Taking ownership of a title

Mike Barlow and Ed Savory, of Leathes Prior’s Franchising Team, consider the issue of whether it matters if you use the term ‘franchise owner’ instead of ‘franchisee’.

Within the franchise industry, the term ‘franchisee’ is widely recognised and understood but does that mean it is wrong or dangerous to use the term ‘franchise owner’?


The status and rights of a franchise owner have little to do with its name and far more to do with the provisions of the Franchise Agreement under which it operates and its business relationship with both the franchisor and other franchise owners within the franchise network.

Under a properly drafted Franchise Agreement, a franchise owner will be licensed to operate the franchise business in accordance with the provisions of the Franchise Agreement and the Operations Manual for a specified term (typically five to 10 years). The franchise owner will operate independently and although the conduct of the business will be closely regulated by the franchisor, franchisors will be (and should be) keen to ensure that the operators of the franchised businesses have a sense of ownership and are able to realise the fruits of their efforts in building their businesses. Indeed the ‘ownership’ rights of franchisees/franchise owners will be recognised in Franchise Agreements, regardless of the name adopted, for instance, by way of sale of business provisions.

It is worth noting that on a resale of a franchise, just like the sale of any business, the seller will transfer a package of rights and interests – some of these will be owned and others will be subject to the rights and interests of third parties.

Rights

It is difficult to see that the mere use of the term franchise owner somehow conveys that such a person (whether as an individual or a company) has some enhanced rights in the franchisor’s system beyond those typically enjoyed by a franchisee. However, the adoption of the term may raise important questions concerning the representations being made to a prospective franchise owner prior to the grant of rights; in particular, is the franchisor making clear that no proprietary rights in the franchise system will be acquired?

If the Franchise Agreement is poorly drafted and there is uncertainty over the extent of rights granted to a franchise owner through its dealings with the franchisor or otherwise, it is possible to see that the question of the rights granted to the franchise owner in the franchise system could be an issue that might entertain the courts. The term franchise owner in itself will not mean that the business operator will become something other than a franchisee/franchise owner.

Marketing

In a constantly evolving industry, some franchisors may be keen to look for ways in which to modernise their marketing approach – and it is important to remember that most potential franchise owners will be new to franchising and so will not be up to speed with industry terminology. One way to modernise and become more approachable may be to move away from some of the more traditional language. This is, no doubt, reflected by the current trend by some franchisors to use the term franchise owner.

However, franchisors need to be careful not to oversell. The risks of confusion or potential claims for misrepresentation or under Franchise Agreements are unlikely to be based on the use of the term franchise owner. Instead they are most likely to be caused by the franchisor over selling and promising the potential franchise owner something more than is actually on offer or a badly drafted contract. The upshot is that if a franchisor finds itself in difficulty by calling its franchisees ‘franchise owners’, then, more likely than not, this will be symptomatic of a greater malaise – perhaps poorly briefed or disciplined staff or an inexperienced professional team.

What are the risks?

The use of the term ‘franchisee’ for fear that by describing a franchise business as being ‘owned’ may dilute a franchisor’s rights of ownership is somewhat conservative and over cautious. The real issue for the franchisor to deal with is to ensure that the Franchise Agreement, Operations Manual and dealings with franchise owners reflects the reality of a genuine franchisor/franchisee /franchise owner relationship.