There is no specific franchising legislation in the UK. Instead, a franchise agreement will utilise a combination of developed and evolving case law across multiple commercial legal disciplines, including contract law, intellectual property rights, employment, competition, and dispute resolution law.
As such, the franchise agreement becomes a fundamental document that captures the intentions of both the franchisor and the franchisee across all aspects of the arrangement.
In this article, our franchise legal experts examine the key legal documents and considerations for successfully franchising your business. If you're ready to take the next step in franchising your business or selling your franchise, our team of franchise law solicitors can provide the proper legal support to help you reach your goals.
Contents:
Legal documents needed to franchise your business
When you franchise your business, you will need a variety of legal documents, including:
- Franchise agreement – The franchise agreement is the backbone of the relationship between the franchisor and the franchisee. It provides essential protections and requires the franchisee to exercise the rights granted by the conditions imposed by the agreement. For additional reading on models, please refer to our guide on how to make your business a franchise.
- Franchise manual - The franchise agreement should be supplemented by a franchise manual, under which the franchisee is contractually obligated to meet the standards detailed in the manual. The manual protects both you, the franchisor, and the franchisee’s fellow franchisee,s who will want every franchisee to maintain consistently high standards. Contractually, it is far simpler to update the manual continuously to apply to all franchisees than to update each franchise agreement.
- Non-disclosure agreement (‘NDA’) – if you don’t want a franchisee to disclose commercial information provided during the franchise negotiations to third parties, a non-disclosure agreement will help to protect your confidential business information.
- Exclusivity agreement - When entering negotiations with a franchisee, you may request that the franchisee enter an exclusivity agreement to prevent them from engaging in talks with another franchisor during the exclusivity period.
- A lease, sub-lease, or licence - if you lease or own the premises where the franchisee will operate the business, then you will need the franchisee to sign an appropriate lease / sub-lease or licence (as applicable)
- Intellectual property agreement - a separate licence granting the franchisee the right to use your IP may be necessary.
Selling a franchise
Selling a franchise is similar to selling a business; your buyer will want to conduct due diligence, and their lawyers will likely negotiate various aspects of the contract. However, unlike a business sale, you will have an ongoing business and contractual relationship with your franchisee, which should be taken into account during negotiations.
Selecting the right franchisee is highly important, given the nature of your ongoing business relationship. You need to consider whether the prospective franchisee can run a franchise and whether they will succeed within your particular organisation.
Your franchise paperwork must be in order before you commence the franchise sales process. For example:
- Preparing your franchise manual and testing it during the pilot period.
- Getting your franchise agreement drawn up.
- Carefully checking all franchise marketing and due diligence material to ensure they contain no errors or omissions.
- If commercial premises are part of the franchise deal, make sure you understand any relevant requirements, such as the landlord’s consent to a sub-lease.
- Registering trademarks and design rights.
- Joining a franchise organisation, such as the British Franchise Association (BFA).
The franchise agreement
The franchise agreement governs your relationship and provides both franchisor and franchisee with protection. Important clauses include:
- Payments – whether it is the initial franchise fee, regular monthly payments, or training and advertising fees - it is essential to have a clear payment schedule. Read more on making money from franchising.
- Use of trademarks and other Intellectual Property Rights (IPR) – you will need to restrict the franchisee’s use of your trademarks, copyrights, trading styles, brand names, and other franchise IP to use in the course of the franchise business and only for the duration of the franchise agreement. If you are new to IPR, you may find our article Intellectual Property FAQs helpful.
- Restrictive covenants – the use of restrictive covenants can prevent the franchisee from soliciting your customers and suppliers, as well as competing with your business, after the end of the franchise agreement. Care must be taken to ensure the scope, extent, and use of restrictive covenants in commercial contracts are enforceable.
- Step-in rights – you may want to include a step-in rights clause to allow you to give written notice to the franchisee to assume responsibility for the management of the franchisee’s business. Such a right should be limited to specific circumstances.
- A right of first refusal – this will entitle you to be offered the first refusal to buy back the franchise business before the franchisee offers to sell the company on the open market to a third party. This can also be linked to a right to veto a sale unless it is to an approved buyer who has been vetted by you, which provides essential protection for your brand’s integrity.
- Termination of the agreement – as a franchisor, your ultimate sanction is to terminate the franchise agreement to protect your interests or the interests of the entire franchise network. Termination triggers should be spelt out in a comprehensive termination clause to minimise the risk of franchise disputes. Termination reasons could include persistent failure to comply with the franchise manual or to pay agreed-upon fees, or a breach of the agreed-upon use of your intellectual property rights (IPR). Termination rights are generally wide-ranging and one-sided, designed to protect the franchisor. It is unusual for a franchisee to be permitted to terminate the franchise agreement during its term.
Grounds for a franchisor to terminate a franchise agreement
To terminate a franchise agreement early, you need the grounds to do so; otherwise, you will be in breach of the agreement. Potential reasons why a franchisor may want to terminate a franchise early include:
- Persistent complaints
- Franchisee’s inability to repay its creditors
- Change of control of the franchisee
- Material breach of the franchise agreement
- Failure to pay amounts due under the franchise agreement
It is sensible to include dispute resolution clauses in the agreement, ensuring an agreed-upon dispute resolution mechanism to minimise the risk of court proceedings.
Can a franchisor sue a franchisee?
As a franchisor, you can sue a franchisee for breach of contract if they fail to comply with the terms of the franchise agreement. That is why it is essential that the agreement clearly defines their obligations. Common reasons you may wish to take action against the franchisee include failure to:
- Maintain franchise standards to the detriment of the brand
- Pay franchise fees
- Comply with advertising obligations within the franchise territory
Dispute resolution is often the best solution for minor breaches, allowing you and your franchisee to continue working together.
International franchising
If you are considering an international franchise, it is essential to obtain specialist franchise law advice in each territory you are looking to enter. Your franchise business will be subject to any relevant local franchise legislation or regulation that may affect how you operate the franchise, how you recruit franchisees, and the rights of both parties on termination of the agreement.
If you are contemplating an international franchise, it is essential to seek specialist franchise law advice in each territory you plan to enter. Your franchise business will be subject to local franchise laws and regulations, which may impact how you operate, recruit franchisees, and manage franchise relationships, including termination rights. Careful preparation is key to a successful global expansion.
Ready to take the next step?
Franchising your business is an exciting opportunity, but establishing the right legal foundations is crucial to long-term success. To help you get started, it's essential to understand the basics of franchising your business. And when you're ready to move forward, our expert franchise law solicitors are here to support you – from drafting tailored franchise agreements to advising on franchise sales and international expansion. Get in touch with us today to find out how we can help make your franchising journey a success.
