If you are thinking about joining a franchise, you should be aware of the legal pros and cons that come with such an endeavour, otherwise known as becoming a ‘franchisee’.
There are multiple legal points to consider when entering into a franchise agreement;
- Lack of express legislation. – This can be both a positive and a negative, however the ultimate position of your franchise will come down to your negotiating power, and often the Franchisor has more power than the Franchisee.
- A number of general legal principles cover franchise arrangement. – You will need to be aware of your rights and obligations under contract law, misrepresentation, intellectual property rights and competition law. These are all areas we would advise that you are properly briefed about before entering into a franchise agreement.
- Regulation by the British Franchise Association. – Franchise arrangements have a governing body which monitors these types of agreements and there will be obligations to meet and criteria to satisfy throughout the duration of the agreement.
- Franchise Agreements often require a Personal Guarantee. – This will mean you will be personally responsible for the performance of your franchise which is not always preferable.
- Limitation of Liability from the Franchisor. – Often, Franchisors word their agreements in such a way that they will have minimal responsibility and liability for any failures or debts of your franchise.
- Business Disposal Restrictions. – The Franchisor may also limit how you are able to sell on your franchise. Unlike a business owner, who can sell their business whenever and however they wish – within reason – the franchise agreement will often dictate how you can sell your business and can limit your options and profitability in the event of a sale.
- Franchisor Insolvency. – If a franchisor becomes insolvent this will more than likely catch your franchise within the insolvency process and could negatively affect your business.
Legal Basics of Entering a Franchise
The first significant feature of entering a franchise is there are no regulations that govern what a franchise is defined as. Instead, ‘franchise’ law by default is drawn from pre-existing areas of law such as the law of contract/misrepresentation, intellectual property law and competition law.
The franchising industry is self-regulating in the form of the British Franchise Association, (BRA), which requires its members to comply with the European Code of Ethics for Franchising, namely dealing fairly between each other.
As there is no legislation to assist, instead, we use a Franchise Agreement. A franchise agreement is made up of looking at the common elements of the contract which forms the relationship between the two parties.
It is, therefore, important to ensure that you have a thorough understanding of your franchise agreement. Our commercial solicitors here at Rudlings Solicitors LLP would be more than happy to assist you with your franchise agreement and your new business venture moving forward.