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Essential Legal Considerations When Buying A New Franchise

July 12, 2019
Essential Legal Considerations When Buying A New Franchise

Before you escape the rat race, you need to weigh up all the necessary legal considerations for franchising. It’s a lengthy process that involves determining exactly what you’re committing to, the total amount payable and your ongoing relationship with the franchisor.

Your goals, objectives and ambitions now have to fall in line with them, so it’s important to know for certain what you both stand to gain. Don’t be mistaken: this starts well before the franchise agreement is signed. It’s likely that you’ll have to sign a confidential agreement and pay a deposit in the early days of your relationship, so any knowledge on legal considerations, government permits, and other necessary legislation will prove beneficial.

While we advise that prospective franchisees seek legal advice prior to any business proposition, we thought it’d be useful to provide an overview of all the essential legal considerations you should make prior to signing an agreement.

What are you operating as?

Similar to legal considerations when starting a business, you need to confirm your legal structure. A number of franchisors will let you operate under whatever structure suits you, however several franchisors insist that franchisees work as limited companies for practical reasons.

In this structure, you’re capable of owning your own assets and liabilities, while entering contracts on behalf of the franchise. Again, akin to the legal considerations when starting a business, you’ll have a single set of accounts and regulatory requirements to meet.

Franchisors will use this system to license their intellectual property to you, protecting their assets should your company fail. In other words, it generally favours both parties to form your legal structure in this way.

Be mindful of legislation

The nature of your franchise determines the permits you’ll need to acquire and the government processes you’ll need to register for. For example, if you were to join a bar or restaurant franchise, you would need a licence to sell alcohol. Similarly, there are legal considerations to make when staff are driving franchise-owned vehicles.

Not all franchises will have a health and safety department, however there will be certain standards outlined within the franchise agreement that will specify required health codes. Ultimately, you’re culpable for injury despite their brand being on the line. Be confident when reviewing the document as to what you are accountable for, and remember that health and safety breaches are handled in criminal court, so it pays to make legal government considerations.

Finally, some franchisors will operate internationally and need to register with either the UK government or the local government. This registration is to monitor the entry of foreign businesses into national markets and is largely handled by the franchisor.

Do you need insurance?

As with the legal considerations when starting a business, whether you need insurance largely depends on the nature of your chosen franchise. If you’re operating a vehicle, for example, then it goes without saying that your staff will need cover.

There are specialist insurers who operate within the franchising world. Your franchisor should recommend a preferred insurer. However, if they don’t, be sure to check in the fine print of your contract what your responsibilities are when it comes to insurance.

Will you require a physical location?

Some franchises, like sandwich shops, will understandably require the use of a physical location. Usually, the purchase of the land for the premises, as well as shop fitting costs, will fall to you as the franchisee. However, there are several pieces of legislation that could impact your purchase.

For example, zoning ordinance rules determine whether or not commercial property can be positioned in certain areas. They set out what’s acceptable for areas of land, as well as the procedures for handling infractions. But this isn’t just a legal consideration for franchising – it’s a civic issue.

Imagine you have a business plan that relies on a certain placement of your operation. You then secure that land, but zoning ordinance changes prior to development. Commercial properties can switch and, occasionally, residents are forced to move in order to accommodate the change. This can obviously cause considerable cost to your business, making it a significant point of discussion during review of your franchise agreement.

At Rainbow, we make the onboarding process as straightforward as possible. We don’t require the purchase of a physical lot, so you won’t need to worry about a large number of permits and legislation that could impact your profits.

We like our franchisees to experience the same direct and rewarding service that their clients receive. If you’re interested in discussing the legal considerations for franchising agreements at Rainbow, get in touch with the team today.