Franchising is a business model in which a franchisor licenses its intellectual property (IP) and business model to a franchisee in exchange for a fee. The franchisee then operates a business under the franchisor’s brand and system.
In the UK, there is no specific legislation governing franchising. However, there are several laws and regulations that apply to franchises, including:
- The Consumer Protection from Unfair Trading Regulations 2008. These regulations prohibit franchisors from making false or misleading representations to prospective franchisees.
- The Competition Act 1998. This Act prohibits franchisors from engaging in anti-competitive practices like price fixing or market sharing.
- The Data Protection Act 2018. This Act requires franchisors to collect and process personal data lawfully and transparently.
In addition to these laws and regulations, a number of industry codes of conduct apply to franchising. The Quality Franchise Associations’ code of conduct is one of the most important of these. The QFA code of conduct sets out several standards that franchisors must adhere to, including providing prospective franchisees with complete and accurate disclosure of material information about the franchise.
The legal obligations of a franchise can be summarised as follows:
- Disclosure. Franchisors must provide prospective franchisees with full and accurate disclosure of material information about the franchise, including the franchisor’s financial performance, litigation history, and any outstanding franchisee disputes.
- Good faith. Franchisors must act in good faith towards their franchisees. This means that they must not make any false or misleading representations, and they must not withhold any material information from their franchisees.
- Support. Franchisors must provide their franchisees with reasonable support. This includes providing them with training, marketing assistance, and access to the franchisor’s systems and resources.
- Compliance. Franchisors must comply with all applicable laws and regulations. This includes the Consumer Protection from Unfair Trading Regulations 2008, the Competition Act 1998, and the Data Protection Act 2018.
If a franchisor breaches any of these legal obligations, the franchisee may be able to take legal action against them. The most common types of legal action franchisees take include breach of contract, misrepresentation, and unfair trading.
Both franchisors and franchisees need to be aware of their legal obligations. By understanding these obligations, they can help ensure their franchise relationship is flourishing.
In addition to the legal obligations listed above, franchisors and franchisees should consider several other factors when entering into a franchise agreement. These factors include:
- The franchise agreement. The franchise agreement is a legally binding contract that sets out the terms of the franchise relationship. It is essential for both parties to carefully review the agreement before signing it.
- The franchise fee. The franchise fee is the initial payment that the franchisee makes to the franchisor in exchange for the right to operate the franchise. The franchise fee can vary depending on the franchise system.
- Royalties. Royalties are ongoing payments that the franchisee makes to the franchisor in exchange for using the franchisor’s IP and business model. The amount of royalties is typically a percentage of the franchisee’s gross sales.
- Training. Franchisors are typically required to provide their franchisees with training on how to operate the franchise business. The amount and type of training will vary depending on the franchise system.
- Marketing. Franchisors are typically responsible for providing their franchisees with marketing support. This support can include advertising, public relations, and other marketing activities.
By understanding the legal obligations of a franchise, both franchisors and franchisees can help to ensure that their franchise relationship is flourishing.