Franchising – Overview and Franchise Disputes
What is franchising?
The Franchise business model is a mutually beneficial method of expanding a business that, over recent years, has led to the immense growth of many of your favourite businesses, that you may not expect to be franchises in the first place! Franchising is where the owner of the business model licenses out the right to use its intellectual property, such as its brand name, logo, its methods of conducting its business. Well known high-street franchisees would include such brands as Pizza Hut, Burger King and McDonalds. They may perhaps even be owned by people that you would not expect, for example, Queen Elizabeth II is said to “own a drive-through McDonald’s close to Buckingham Palace”[1], clearly also wishing to partake in one of the biggest and most lucrative franchises. Franchises are one of the biggest business contributors to the employment and financial worlds, with almost 50,000 franchise businesses adding “over £17bn and 710,000 jobs to the country’s economy”[2].
Albert Singer, the creator of the Singer sewing machines, is considered to be the pioneer of the modern franchise model as he created franchise contracts with manufacturers in the US in order to make and distribute his sewing machines across the country, ensuring they were made to his standard.[3] The first franchise network to be launched in the UK was Dyno-rod in 1960, and after having established the business model, it has “framed its roots and flourished as a proven method for expanding business in the market”[4].
Franchising terminology
Due to the absence of any specific legislation governing franchises, one can find a plethora of definitions for what a franchise, franchisor and franchisee is. However, there are certainly familiar procedures that lead to the creation of a franchise with the franchisor, often a much larger business, requiring its standard form franchise agreement to be entered into before the franchisee is able to trade as a franchisee. This means that whilst the franchisees are left to run independently as a small business, the franchisor maintains control over how the products and/or services are marketed, sold, and the franchisor controls the quality and standards of the way in which the business is operated.
The benefits of franchising
In terms of the benefit to the franchisor, they are able to expand their business, allowing the franchises to tend to their daily functions, all with a minimal financial investment from them. They often charge Management Service Fees which are paid to the franchisor by the franchisee for use of their brand, resources, knowhow and equipment. A typical fee would be something in the region of 5% of turnover although this will differ depending on the nature of the franchise.
For the franchisee, it secures the benefit of being able to own on its own account, with the addition of accessing training, operational and marketing support, all under a recognised brand which gives the new business a status that customers trust which it was unlikely to achieve by itself at the outset. Perhaps the biggest coup for the franchisee is the ability to trade using an established business model with a more well-known brand than would otherwise be the case starting afresh.
Franchise disputes
Franchise disputes may arise just as commonly and along perhaps similar lines to most other commercial ventures. With franchising, however, the nature of the dispute can often take a fairly common form, with those lawyers specialising in such working having “seen it all before”. It would not be uncommon to claims by franchisors where the franchisee breaches the franchise agreement by, for example, trading outside of its exclusive franchise territory, by under-reporting turnover (in an attempt to reduce the Monthly Services Fee payable), or perhaps even through poor quality services or goods being supplied which stand to potentially damage the franchisor’s goodwill.
Franchisees sometimes complain that they were mis-sold the franchise, through some form of misrepresentation, often about turnover or profit projects provided by the franchisor when marketing the franchise. Sometimes, the level of support received is not what was expected, or they feel that at the end of their franchise agreement, they should be able to continue trading without permission from the franchisor – something often prevented by the franchise agreement for a period of time. Franchise disputes around these areas are common. When such situations arise, it is always sensible to seek advice from a solicitor with considerable experience in franchising matters, and especially franchise disputes. Solicitors with experience in this field are immediately conscious of the overarching issues that the parties are likely to face and they are more likely to appreciate the commercial landscape and the dynamics that drive the parties from the start, thus permitting a greater opportunity for a prompt resolution on terms that both parties can accept. Litigation is an expensive, time consuming and stressful business, and if it has to be engaged with, then specialist solicitors with experience in dealing with franchise disputes is an absolute must.
Specialist legal advice
Whilst there can be no doubt that the future of franchising is strong in terms of being a successful model for a commercial venture, the potential for regulation should not be underestimated. Cases decided by the courts often contain specific recognition of factors peculiar to commercial practice in franchising and it is important to have a solid understanding and appreciation of both legal and commercial factors affecting this specialist and substantial business model. Keeping abreast of such nuances and general development in the law is always important and an important skill-set for the franchise solicitor to develop. Franchise disputes should always be handled by specialised franchise solicitors with considerable knowledge in the area. The team at CSK Legal undoubtedly have that expertise, with its franchise team having considerable experience of franchising matters, and franchise disputes in particular, generated over almost 20 years of legal practice in this specialist area.
For further information about the services that we can offer, both in terms of assisting you in establishing a franchise brand, or in resolving a franchise dispute, please contact Craig Kelly or Samantha Pountney on 0121 306 0170.
[1] Franchiseinfo, Amazing Franchising Facts, https://www.franchiseinfo.co.uk/advice/introduction-to-franchising/405/amazing-franchising-facts-infographic
[2] British Franchise Association, Franchise Industry research, https://www.thebfa.org/training-research/franchise-industry-research/
[3] Franchise Direct, 10 Random and Interesting Franchise Facts, https://www.franchisedirect.com/blog/10-random-and-interesting-franchise-facts/
[4] Smriti. G, A Global Analysis on Franchise Agreements, (2018) page 16
