From securing your intellectual property to creating a watertight operations manual, legal specialist Emily Sadler runs through the critical information franchises need to know before entering the U.K.
The U.K. franchise market is big business. The last franchising survey carried out by Natwest Bank and the British Franchise Association (bfa) estimated it to be worth £17.2bn to the U.K. economy. Clearly, we currently live in very different times due to the COVID-19 pandemic; however, franchising has historically stood strong in times of recession and mass redundancies. So, if you are an international franchisor keen to bring your brand to the U.K. market, what do you need to know?
“An association with the bfa shows that you want to expand properly and ethically and could help improve your credentials upon entering a new market”
Consider carefully who you partner with
Before entering the U.K., it is key that you take proper, bespoke advice from local professionals, who know and understand the local market – and have relevant experience of bringing a franchised business into the U.K. from another territory. These professionals will include franchise consultants and specialist banks, accountants and lawyers. In particular, a good relationship with a franchise consultant and lawyer will prove invaluable in getting established in the U.K. and for further expansion within.
The bfa – the self-regulatory body for franchising in the U.K. – aims to promote ethical franchising in the U.K.; it’s a wealth of information for prospective U.K. franchisors and an excellent source of accredited, professional contacts. They have also recently established a ‘U.K. Developer’ category of membership, which is available to any established international brand that can evidence it has a proven business model, and has traded successfully – with an established network of franchisees – in its country of origin. An association with the bfa shows that you want to expand properly and ethically and could help improve your credentials upon entering a new market.
Research and test
Whilst you may have been running a very successful franchise operation in another country, there are no guarantees that the same operation will be a runaway success in the U.K. Your products and services may have different appeals in different countries. Even McDonald’s serves different menus around the world. Therefore, it is always a good idea – just as when starting out in franchising – to carry out market research and run a pilot operation to test the local market, preferably for at least six to 12 months. You need to ensure there is a demand for your business and that the franchise opportunity fits with British tastes and trends. Running a pilot will allow you the opportunity to make any necessary changes to the system before selling franchises in the U.K., hopefully avoiding any costly mistakes.
Which model is commonly used?
Due to the small size of the U.K., regional franchises are uncommon – a U.K. franchisor will typically grant individual franchises to franchisees. For foreign franchisors, the most typical method of entering the U.K. is to grant a master franchise or development agreement covering the whole of the U.K.
Protect your IP in the territory
One of the key assets that form part of your franchising offering, is your brand – the name of the franchised business and, probably, a logo. Both of these represent the goodwill and reputation of the franchise and should be protected by a trademark registration. You will need to consider and budget for trademark registrations – both in the country where the brand originates and in the U.K. and/ or EU. Trademarks in relation to goods or services can be registered at the Intellectual Property Office (IPO) as a U.K. mark, or at the European Union Intellectual Property Office as a community mark. The registration of trademarks at the IPO is a relatively simple and inexpensive process, so long as no opposition to the registration is logged.
Think carefully about what goods and services your trademark registration needs to cover and seek professional help where necessary. It’s important there are no ‘holes’ in your registrations, and that you have effectively protected all the goods and services that your franchise offers.
It’s essential that the trademarks are owned by the franchisor and the franchise agreement should contain an express prohibition on the franchisee from registering the brand under their own name. Allowing the franchisee to make trademark registrations only brings trouble down the line when the franchise either expires or is terminated, as the franchisor will have difficulty getting the registration back.
“Business regulation in the U.K. is relatively light-touch, as evidenced by its approach to franchising”
Similarly, there should also be a clause in the franchise agreement which relates to goodwill and which states that all goodwill built up by the franchisee under the agreement, belongs to the franchisor. Again, this avoids difficulties at the end of the franchise, when franchisees are trying to claim that the goodwill in that territory belongs to them. Putting it in clear contractual wording prevents this problem from arising – or if it does, provides clarity on the legal position.
Know the local law
Business regulation in the U.K. is relatively light-touch, as evidenced by its approach to franchising. Unlike some other jurisdictions, such as the U.S., there are no specific franchising laws or regulations. Instead, English contract law applies and the terms of the franchise agreement will be key to the relationship between franchisor and franchisee.
While contract law in the U.K. gives contracting parties (business to business) a great deal of freedom to contract as they should wish, English law franchise agreements do tend to follow a similar format. Bear in mind that if you choose to become a member of the bfa you will also need to comply with its code of ethics.
In the U.K., there are no legal requirements regarding due diligence, nor any registration requirements. Although the overall effect of Brexit remains uncertain, it seems unlikely that there will be any legal change as a result that would significantly affect franchising.
It is critically important that a U.K. lawyer, with general experience of franchising and of ‘anglicising’ franchise agreements, reviews your current franchise agreement and amends it as appropriate for the U.K. market. The U.K. lawyer can ensure that the agreement is enforceable and will adequately protect you in the event of a franchisee dispute.
Your operations manual will also require adaption for how the business will operate practically in the U.K. It will be important to consider laws relating to data protection, competition law, misrepresentation, intellectual property, real estate and employment law which will all have general application to any business operating in the U.K. When marketing the business in the U.K., you will need to consider its advertising standards. As with the legal landscape in any country, this could all prove to be a minefield and has the potential to trip you up; specialist advice is non-negotiable.
FIVE CONSIDERATIONS FOR EXPANDING BRANDS:
1. Prioritize getting specialist advice from U.K. experts. The bfa is a good source of information and contacts.
2. A pilot operation is highly recommended and will ensure there is both demand for your products/services in the U.K. and that your system can be successfully adapted.
3. The U.K. is small! Think carefully about which territorial rights to grant and the best expansion model to use.
4. Register your trademark with the U.K. IPO.
5. Franchising is largely unregulated in the U.K. The terms of the franchise agreement will be governed by English contract law. Take local law advice.
Emily Sadler is a senior associate solicitor and franchising specialist at Paris Smith.