Franchise agreements in the post-COVID world: how can franchisors and franchisees protect their position?
Despite the widespread economic turbulence throughout 2020, we have seen the franchise sector remain buoyant and even set to expand in 2021 with more businesses recognising the speed and ease at which they can explore new revenue streams through franchising. In this article we look at what franchisees and franchisors should bear in mind when considering their franchise agreements as the UK market is unlocked.
We have worked with a growing number of businesses, particularly in the food & drink sector, that have set-up international franchise networks to maintain and increase revenue whilst the UK market has been restrained by lockdowns and other COVID-19 restrictions. This entrepreneurial spirit seems here to stay in the post-COVID franchise landscape.
However, whether you are seeking to implement a new franchise network as a franchisor or join an existing franchise network as a franchisee, the process does trigger certain contractual challenges. What follows is a brief overview of some of the contractual issues that we have worked with our franchising clients to tackle during the pandemic.
For franchisors seeking to implement a new franchise network or refresh their existing franchise network:
1) Ensuring that your template franchise agreement is robust and compliant. The franchisor must ensure that it has a robust template franchise agreement in place that it can deploy across its franchise network to ensure uniformity of terms. This is fundamental to facilitate the smooth running of the franchise network.
Also, if a franchisor has been using the same template franchise agreement for a number of years without it being updated then it is advisable that the template is reviewed by a franchise expert to ensure that the terms reflect post-COVID market standards and legal requirements. In particular, the UK data protection regime has been subject to change as a result of Brexit and, as such, franchisors need to ensure that their template franchise agreements are compliant with the current regime.
2) Maintaining adequate operational control over the franchise network. COVID-19 has changed the way many businesses, across a variety of sectors, carry out their day-to-day operations. The result of this from a franchising perspective is that some franchisees have begun to explore new commercial opportunities that are outside of the franchisor’s usual business model, which risks unintended diversification and brand dilution across the franchisor’s franchise network.
Therefore, the franchisor’s franchise agreement should provide scope for their franchisees to remain agile in the market whilst at the same time ensuring that the franchisor is able to maintain adequate influence and control over the operations of the franchisee’s business to facilitate uniformity across the entire franchise network and minimise brand dilution. One way to manage this process is through the effective utilisation of the franchisor’s franchise manual, but this will need to be backed-up by appropriate provisions in the franchise agreement. Our expert franchise lawyers can help with structuring this.
3) Brand protection. Now more than ever, brand maintenance is key to maintaining and increasing market share. Therefore, franchisors must ensure that if their franchisees act improperly and in a way that damages and/or dilutes the franchisor’s brand then the franchisor has the ability to take appropriate action to remedy the damage caused.
For businesses seeking to join an existing franchise network as a franchisee:
1) Return on investment. With raising capital being ever-challenging, any new franchisee business should ensure that the relevant franchise opportunity offers a clear return on the franchisee’s investment. Such return on investment may be realised through revenue generated during the term of the franchise agreement and/or via the sale of the franchisee’s business. As such, a review of the franchise agreement should be undertaken to ensure that it does not contain any ‘nasty surprises’ that may restrict the franchisee’s return on investment.
2) Cost visibility. Businesses are, understandably, very cost sensitive in the current market. As such, we recommend that the franchisee seeks expert advice to ensure that the franchise agreement in question does not provide scope for the franchisor to freely increase its fees or impose additional fees on the franchisee.
3) Expansion opportunities. The franchisee should consider what opportunities and incentives it expects to receive when it’s able to demonstrate that its franchise business is successful and profitable. Such opportunities may take the form of expansion into new territories or access to new product lines. The franchisee should ensure that its franchise agreement reflects and facilitates the expansion opportunities that it expects to receive.
If you have any questions regarding a franchising opportunity or project, our expert franchise lawyers can help. Please do get in touch.
You can read more intellectual property insights in our Spring 2021 OwnershIP magazine here.
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