Franchise businesses can be a great way for individuals to set out on their own while benefiting from the support of an established business model. It is also a great way for existing businesses to leverage their brand and industry knowledge with the help of locally based entrepreneurs.
Before entering into a franchise, both parties should understand the nature of the franchise agreement and have a strategy for dealing with any disputes that arise.
Introduction
The UK does not have specific franchise laws but there is a voluntary body, the British Franchise Association, which provides some self-regulation. The International Franchise Association describes a franchise as the agreement of license between two legally independent parties, which gives a person, the franchisee, the right to market a product or service using the trademark or name of another business, the franchisor.
Franchising usually involves adopting the operating methods of the franchisor, who in return is obliged to provide rights and support to the franchise, subject to the franchisee paying a fee to the franchisor.
Types of Franchise agreement
The most common type of franchise agreement is a single-unit franchise. Under this type of agreement, the franchisee would be given the rights to open and operate just one franchise unit.
There are also multi-unit franchises, which allow the franchisee to open a certain amount of units within a set time, in a set area; this is known as an area development franchise.
The other multi-unit franchise agreement is known as a master franchise, which, in addition to an area development franchise, gives the franchisee the right to sell further franchises within the specified area, known as sub-franchising.
Franchise Disputes
Franchising agreements due to their nature can be very long and complex, stipulating many conditions which both the franchisor and franchisee must continuously meet. Disputes will arise when one of the parties feels the other is not meeting their obligations, such as the franchisee not meeting sales targets, or the franchisor not providing adequate support.
Inevitably, disputes are more common when the franchise performs poorly, as both parties look to blame the other. Even when a franchise is performing well, disputes can arise when the franchisee looks to expand or perform outside the scope of their franchise agreement.
Managing Disputes
In most instances, disputes are minor and can be resolved by the parties coming together to find a commercial solution to the problem, from the re-negotiating of contract terms to the franchisee selling their franchise business.
If a commercial solution cannot be agreed upon, the dispute can be settled through mediation which is generally less expensive than litigation. A mediator will attempt to facilitate both parties in coming in an agreement in a structured manner, which may be more successful than just negotiation between the parties.
Litigation should only be used where there is no hope of reconciliation, or either of the parties has committed a fundamental breach of contract, be it an implied or express term.
Conclusion
There are many advantages to becoming a franchisee, such as using an established business and trading a known brand, being provided with the support and security of a larger business and the ability to acquire business finance more easily.
However, there are compromises. Franchisees may lack overall control and need to follow strict franchise rules. There are also additional costs associated with franchise start-up and on-going trading.
Before you consider franchising as a franchisee or franchisor, it is essential to get expert advice; Rollingsons has experienced lawyers who can assist you. For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.
