Effectively, franchising is where an established business ‘sells’ certain elements of their business to a 3rd party enabling that 3rd party to use their trade name [and trademarks] whilst offering “back room support” such as websites, database information, clients, training procedures and business model. This arrangement is usually undertaken for an initial franchise fee and thereafter an annual agreed percentage of the sales revenue.
Within England and Wales, there are 3 commonly used franchises:
Business Format Franchise:
Traditionally, this is where a franchisor licenses the franchisee to trade whilst benefitting from the franchisor’s branding, business models and other key business assets whilst providing support and guidance [under the terms of the agreement].
Before entering into a franchise agreement, most franchisees will create a trading entity that suits them whether it be a Partnership or a limited company and that entity will be the franchisee. Franchise agreements can ultimately last as long as the franchisor and franchisee require them but more often than not, the agreements are designed to last for perpetuity.
Product Distribution Franchise:
A product distribution franchise is where a franchisor permits the use of their logo (and associated branding) and reputation along with permission to sell their products but does not offer any other form of support. It would be fair to suggest that this form of franchising is simply a manufacturer / distributor style relationship that provides “branding” provisions. The most common example of this style franchise would be petrol stations.
In markets where competition is rife, these style franchise agreements are most common. A manufacturing franchise is where goods and services are ‘franchised’ under the franchisor’s brand name but are not actually sold by the franchisor. The food and drink industries are where this style arrangement is most common.
Taking a franchise can be of significant benefit as it can help with minimising the initial trading concerns that a new business has because it has the infrastructure and reputation of an established business to rely upon. However, because of the cost and the implications of taking a franchise or alternatively, seeking to franchise out your business, it is necessary to take bespoke legal advice on such matters.
We at ehl Commercial Law can assist with such matters. The firm’s Senior Partner is a leading authority with regards to franchising as are the rest of the Corporate / Commercial team and they would be delighted to assist in respect of such matters.