Franchising is becoming increasingly popular throughout the UK, with Scotland a notable area for growth for many franchise brands. However, although there are many franchise success stories, there are legal aspects to consider before embarking on this particular business journey.
How does franchising work?
As a business model, franchising enables people to run their own businesses while using a framework and support network that has been put in place for them. What usually happens is the franchisor develops, tests and refines the business model, before the franchisee then buys the right to operate that model, either in a particular location or according to a specific set of circumstances.
People looking to set up or buy a franchise business should be aware there is more to the process than simply signing a membership form. Indeed, due diligence is extremely important in advance of making a purchase, particularly in researching the business history and financial records of the franchisor.
Although the benefits of taking on a franchise can include taking on a brand with a good reputation and working practices, you may still need to pay a deposit or ‘franchise fee’ up front. Then there are other costs to consider, such as potentially leasing premises in your own name, as well as any stock and management service fees. Similarly, a franchise may appeal in terms of receiving initial training and support from the franchisor, but these are additional items you may have to budget for.
Legalities and franchise agreements
Although it may initially seem quite specialised, in Scotland, the primary focus of franchising law is the franchise agreement. These are complex, legal contracts, binding the franchisee to specific terms for a set period of time. As it is a binding written agreement between two parties for mutual profit and obligation, it is wise to take legal advice from a solicitor before signing anything.
Solicitors are accustomed to complex legal work and can help you understand what every sentence and point in the agreement means to you. So, whether you are looking to set up anything from a gym franchise to a coffee shop chain, your solicitor will be able to flag and amend anything deemed too unacceptable and onerous before you put pen to paper. They will be on hand to understand your business needs and help redraft and amend the franchise agreement to best suit your needs.
What does a franchise agreement include?
No two franchise agreements are the same, but some of the provisions of a franchise agreement are likely to include the rights granted to the franchisee. This is usually alongside the obligations of the franchisee and the franchisor respectively, both initially and ongoing. It should stipulate the duration of the franchise agreement, as well as the terms for its renewal.
Other provisions often included are any terms governing the potential sale of the franchise, terms for the use of the intellectual property of the franchisor, and provisions for the termination of the agreement. Of course, there may be more specific points relating to the franchise in question, further reiterating the importance of using a solicitor to ensure the document sets out the relationship between all the parties involved.
Once the document has been signed, the franchisee is then bound by the terms of the contract. Bear in mind it may contain clauses about the stock you are required to buy (and its price), as well as the share of turnover or profits you have to pay to head office. From an administrative point of view, it could also outline the records you need to keep, the staff training, health and safety, data protection and the required hours of opening.
Plus, if the franchise is not just limited to Scotland – such as UK-wide, or even international, there may be added English law provisions you need to be aware of. Conversely, for solely Scottish franchise agreements, a Scottish Addendum will need to be prepared for premises-based franchises, due to Scotland’s property laws being different from the rest of the UK.
Selling a franchise
What happens if you want to sell the business later down the line, such as at a time when you want to stop work or retire? Again, there are usually strict rules that apply in these circumstances, plus it is likely the franchisor will be entitled to a cut of any sale price or premium.
Anyone looking to purchase your existing franchise business – in what’s referred to as a ‘franchise resale’ – will need to review the franchise agreement to make sure there are no clauses, restrictions or other requirements in place. This makes it even more important to get the contract right in the first place, as it may form the basis of a future sale agreement.
Similarly, the seller will have to determine the value of the franchise business, which could include assessing any assets, revenue, profitability and growth potential. All necessary documentation relating to the business will also need to be in order, such as financial reports, tax returns, lease agreements and any other relevant paperwork. After all, any potential buyer will be looking to conduct the same due diligence you did when originally purchasing the franchise. Plus, don’t forget to notify employers, customers, suppliers and any relevant stakeholders about the sale, to ensure a seamless transition of ownership.
Again, it is shrewd to hire a solicitor experienced in business sales to assist with drafting any contracts, navigating legal requirements and ensuring the entire process runs smoothly.
John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for almost 20 years, with experience in all areas of business law.
