Businesses are always looking at ways to grow, especially if they have saturated their current territory of operation, and one way for franchisors to achieve this is to set up their franchise in new international territories. Matthew Downing, a Solicitor in the Commercial team, looks at some of the important considerations for bringing a successful franchise from America to the UK.
There are a number of options available to an American franchisor wishing to establish a presence in the UK. The most suitable method for doing this will largely depend on what the business is looking to achieve, i.e. whether it wants to control the expansion itself or sell the rights to someone else with local knowledge to expand the business. In order to bring the franchise to the UK there are three main options available to the American franchisor:
• To grant franchises directly to franchisees in the UK.
• To set up a subsidiary in the UK.
• To enter into a Master Franchise Agreement for the UK.
Due diligence
It is vitally important that the American franchisor researches the UK market thoroughly and tries to establish if opportunities exist for its product(s) and/or service(s) and its related branding. It may be that changes need to be made before the franchise is suitable for the UK. There is also a need to ensure that intellectual property rights belonging to the American franchisor are fully protected in the UK and particular advice from a UK solicitor should be obtained to ensure this is the case. Once it is decided that the UK is a viable market, the American franchisor then needs to decide which of the above options would be the most suitable to bring the franchise to the UK.
Granting franchises directly to franchisees
This would involve the American franchisor granting the franchising rights for territories in the UK directly to the UK franchisees. This would enable the American franchisor to retain control of the franchise expansion, but it may be difficult to manage this expansion without an actual presence in the UK. It is quite common before setting up a network of franchisees in the UK to set up a pilot scheme with one franchisee. This allows potential problems to be ironed out before establishing a network of franchisees and enables the American franchisor to decide if the franchise is likely to succeed in the UK.
Setting up a subsidiary
This is a relatively straightforward process and involves the American franchisor incorporating a company in the UK. This company would then be the basis for the UK operations and can manage the franchise for the UK. It will act as the franchisor for the UK. This has the advantage that it allows the American franchisor to keep better control of the expansion and allows it to actively manage UK operations. It makes it easier to offer assistance to the franchisees and to resolve problems that arise. It may also make it easier to comply with UK Law and Regulations as, for instance, UK employment and company law is different to that in America. It would be prudent to take advice here from a UK solicitor before setting up the subsidiary, especially if operations will be managed by an individual who is not familiar with UK regulatory requirements.
Master Franchise Agreement
In entering into a Master Franchise Agreement the American franchisor would be agreeing to grant the exclusive right to operate the franchise in the UK, effectively appointing someone else to operate as the franchisor for the UK and grant franchises to UK franchisees. This takes away a lot of the American franchisor’s ability to control the expansion and in order to retain as much control as possible, the Master Franchise Agreement will need to be carefully drafted. It is common that a number of obligations are agreed and it is usual that a provision is included that the UK franchisor can appoint franchisees in the territory on the basis of a Franchise Agreement stipulated by the franchisor. One difficult decision may be determining what fees need to be paid for the rights being granted under the Master Franchise Agreement, which might include royalty fees as well as a one off payment.
Franchise Law in the UK
In America there are regulations that impose substantial disclosure obligations in certain states relating to franchising. In the UK, aside from general company law, there is very little regulation in this area. The UK system is, however, self regulated by The British Franchise Association, membership to which is optional and its members are required to abide by the European Code of Ethics for franchising as part of their membership agreement. Generally, however, the buying and selling of franchises is governed by contract law, which makes the individual Franchise Agreements a crucial document as it sets out the rights and obligations of the franchisor and the franchisee.
For advice on setting up a franchise in the UK or drafting Master Franchise Agreements, please contact Matthew Downing on 01603 598000 or alternatively by email to mdowning@steeleslaw.co.uk.