Business Law & Compliance

Legal tips for those planning to launch a franchise

4 min read

27 May 2016

Launching a franchise can mean potentially rapid expansion without the need to raise significant amounts of capital, but there is much to think about in terms of legal framework.

There are benefits for the franchisee as opening a franchise will be a less risky route than starting a business from scratch as the franchised business will already have proven success in the market place.

Franchising is becoming a popular way of expanding a business. One recently publicised example of this is the announcement that Pizza Hut, an already hugely successful franchise, is set to expand in the UK and Ireland with plans to invest £40m to open 200 new takeaway franchise outlets by 2020. So what do you need to know if you want to follow the pizza chain’s example and become a franchisor? 

The franchisor will be required to set up a framework providing training and assistance to the new franchisee but still retaining a significant amount of control over the business. As with any new business venture there are risks and rewards involved in such expansion but there is encouraging research to suggest that franchise businesses have a lower failure rate than new businesses.

For the franchisor there are a number of factors to consider, importantly:

  • Ability to franchise;
  • Consistency;
  • Brand protection;
  • Control; and
  • Confidentiality.

Franchising a business involves granting a licence to a third party (the franchisee) and allowing them to run a business as their own under your brand. A well drafted franchise agreement should (at the very least) cover the above points and be entered into alongside a franchise operations manual. You will moreover need to ensure you have a strong brand and business model in place to enable the franchisee to run the business without your participation.

Brand protection is one of the most important considerations as the franchise will be seen as an extension of the original business as it represents the brand being invested in. The intellectual property must be identified and properly protected before the business is franchised so that the franchise agreement can clearly set out the rights and permission for use of them to the franchisee.

Read more about franchises:

A franchisee should try to find out as much as possible about the franchisor and gain an understanding of the business sector and any current issues that might affect the sector. Once the franchise is up and running the franchisee will need to make sure it adheres to the terms of the franchise agreement and operations manual.

With the correct paperwork and controls in place, a franchise can be a rewarding business experience. As long as each party understands the risks and rewards of entering into the relationship and what is expected of each of them there can be no doubt that it can be a profitable venture for both franchisor and franchisee.

Elsewhere, Rik Hellewell, franchising expert and founder of oven valeting business Ovenu, talks about the advantages of setting up a franchise compared to growing a business organically.

Vanessa Crawley is a solicitor in the corporate team at SA Law.