Understanding the Legal Requirements of a Franchise

Have you ever wanted to enjoy the challenge and satisfaction of running your own business, but you don’t have the money or resources to start a business from scratch? Buying into a franchise can be the perfect solution, allowing you to own and manage your own business with the help of an established brand.

As with any major financial decision, however, it’s important to understand the legal obligations and restrictions that come with purchasing a franchise - there are certain laws and legal requirements that the franchisor and franchisee must both adhere to in order to ensure fairness and compliance with the law.

To help ensure you have the right information before signing a franchise agreement, we took a closer look at some of the key legal obligations that come with franchising.

What Is a Franchise?

Before we dive into the legal obligations of a franchise, it’s important to understand what a franchise is. In short, a franchise is an agreement between two parties: both the franchisor - usually an individual or company that owns and operates a business - and the franchisee - someone who purchases a license to operate their own business using the franchisor’s brand, trademark, and other intellectual property.

Legal Obligations of the Franchisor

While the UK has no dedicated, specific legislation governing or surrounding franchising, there are a number of regulations and legal precedents which apply to franchise owners, and potential franchisees. These include:

• The Consumer Protection from Unfair Trading Regulations 2008 - these are regulations which prohibit franchisors from making false or misleading representations to prospective franchisees.
• The Competition Act 1998. This is an Act which prohibits franchisors from engaging in anti-competitive practices like price fixing or market sharing - for example, requiring franchisees to buy certain materials or products from the franchisor.
• The Data Protection Act 2018. This Act requires franchisors to collect and process personal data lawfully and transparently, including when handling franchisee information.

Compliance with competition law is crucial to ensure that franchise agreements adhere to legal standards, particularly in avoiding anti-competitive behaviour such as restrictions on franchisee pricing and territorial encroachment. With this in mind, there are a number of areas in which a franchise can be seen to have a legal obligation, and these include:

Disclosure

The first obligation of a franchisor is to provide the potential franchisee with a disclosure document. This document is crucial as it ensures transparency and compliance with competition laws, thereby safeguarding the entire franchise agreement. This document should contain all relevant information about the franchisor and their business, including financials, marketing strategies, training material, etc.

The disclosure document must also include details on the fees associated with the franchising agreement as well as any restrictions that may be in place which could limit the franchisee’s ability to operate the business. Any history of litigation or outstanding franchisee disputes.

Support & Training

The franchisor is also obligated to provide franchisees with adequate support and training in order for them to effectively run the franchisee's business. This includes providing ongoing assistance such as access to resources, staff training, marketing material, etc.

In addition, franchisors must ensure that franchisees are kept up to date with any changes to the business, such as new products or services, or changes in the law that may affect their operations.

Good Faith

The law also requires that the franchisor and franchisee act in good faith when entering into a franchise agreement. This means that both parties must be honest, fair, and transparent in their dealings with one another.

Compliance with Franchise Specific Laws

Franchise agreements must also comply with all applicable laws and regulations. This includes any local or national legislation which applies to the franchise in question, as well as any industry specific guidelines that may apply.

Adherence to the Dispute Resolution Process

The goal is to resolve any disputes between a franchisor and a franchisee in an amicable and timely manner. This includes following the dispute resolution process outlined in the original agreement. If either party fails to abide by this process, then the other party may be able to take legal action, which is likely to involve expensive litigation.

Franchisee Responsibilities

Operational Compliance

As a franchisee, it is essential to comply with the operational standards set out in the franchise agreement. This includes adhering to the franchisor’s business model, using approved suppliers, and maintaining the required level of quality in products and services. Franchisees must also comply with all relevant laws and regulations, including health and safety, employment, and environmental laws. Ensuring operational compliance not only helps in maintaining the integrity of the franchise system but also protects the franchisee’s business from potential legal issues.

Financial Obligations

Franchisees have various financial obligations, including paying franchise fees, royalties, and other charges as specified in the franchise agreement. They must also maintain accurate financial records, submit regular financial reports to the franchisor, and comply with tax laws and regulations. Meeting these financial obligations is crucial for the smooth operation of the franchise business and helps in fostering a positive franchise relationship with the franchisor.

Brand Standards

Franchisees are responsible for maintaining the franchisor’s brand standards, including using approved branding, signage, and marketing materials. They must also comply with the franchisor’s social media policies and ensure that all online presence is consistent with the brand’s image and values. Adhering to brand standards is vital for preserving the reputation and uniformity of the entire franchise network, ensuring that customers receive a consistent experience across all franchise locations.

Liability and Risk Management

Insurance Requirements

Franchisees are typically required to maintain certain types of insurance, such as public liability, employers’ liability, and business interruption insurance. The franchisor may also require franchisees to maintain specific levels of insurance coverage, and franchisees must ensure that they comply with these requirements to avoid breaching the franchise agreement. Having the right insurance coverage is essential for protecting both the franchisee’s business and the franchisor from potential claims and losses. Read more about the types of insurance You’ll need when starting a cleaning business. 

It is essential for franchisees to understand their liability and risk management obligations under the franchise agreement. This includes being aware of their responsibilities in relation to employee safety, customer safety, and data protection. Franchisees must also ensure that they have adequate insurance coverage in place to protect themselves and the franchisor in the event of any claims or losses. By understanding their responsibilities and obligations, franchisees can minimise their risk and ensure a successful and profitable franchise business.

Considerations for Prospective Franchisees When Choosing A Franchise Agreement

It is important to ensure that the franchise agreement you enter into is fair and equitable, and that it is the right choice for your business aspirations and goals as a prospective franchisee. Some of the main things to consider when choosing your franchise include:

Understand the Agreement

Before signing a franchise agreement, it is essential to understand exactly what you are signing up for and the legal obligations that come with it. Understanding different types of franchise agreements, including the master franchise agreement, is crucial. Make sure you read the disclosure document thoroughly and ask questions if anything is unclear. It’s also important to have an understanding of any applicable laws or regulations which may affect your business.

Consider the Track Record of the Franchise Network

You should also consider the franchisor’s track record in terms of business performance, customer satisfaction, and any legal issues they may have faced. This will help you to judge whether the franchise is a good fit for you.

Do Your Research

Finally, do your research into other franchisors that are available in order to make an informed decision as to which would be the best fit for you. Understanding and safeguarding intellectual property rights is crucial in franchise agreements to protect the franchisor's brand and prevent legal disputes. Talk to current and past franchisees to get an accurate picture of what it’s like to work with the franchisor. Read more about our work with franchisees by visiting our recent franchise case studies. 

Understand The Franchise Fee and Royalties Agreement

It's important to understand the franchise fee and royalties agreement before signing the agreement. Make sure you are aware of any restrictions on operations, the process for calculating royalties payments, and any other fees that may apply.

Understand the Marketing Model

You should also make sure that the marketing model used by the franchisor is suitable for your business. This includes understanding how they plan to market and promote your franchise, as well as any restrictions on advertising or marketing activities.

Unlock Your New Franchise with Jani King!

Here at Jani King, we understand that taking on a new franchise can be daunting, and that is why our cleaning franchises are set up to help you succeed.

All of our cleaning franchises include comprehensive training, support, and advice. We cover everything from the basics of running your business to more advanced topics such as marketing strategies and customer service techniques, and out dedicated team will be on hand to answer any questions you may have and provide guidance whenever necessary. Get in touch today and unlock your new franchise with Jani King!