Even though there aren’t any specific laws governing franchising in the UK, there are nevertheless legal rules and regulations that franchisors and franchisees must abide by. Examples relate to director’s liability, trading, employee relationships, lease agreements and more, which means franchises are governed by rules related to standard businesses.
Despite the absence of direct legislation governing franchising, the British Franchise Association (BFA) can be considered an industry trade association that has issued a Code of Ethics that members can voluntarily subscribe to in franchising as a way of self-regulation. The Belvoir Franchise Group is a shining example of a franchisor that complies with this code.
Against this backdrop, it is important to ask questions related to franchise liability so that the parties entering into the franchise relationship are aware of their duties and responsibilities. With this in mind, we explore questions such as what is the liability of a franchise and do franchisees have limited liability to give you more solid footing in navigating the franchisor-franchisee relationship.
Keep reading to find out more.
What are franchise assets or liabilities?
To answer the question “what are franchise assets and liabilities”, we must first consider the franchise ecosystem as a whole. This ecosystem is characterised by a franchisor who enters into an agreement with a franchisee to use the franchisor’s intellectual property, proprietary systems and in-house knowledge and trade secrets in exchange for the payment of an initial franchise fee and ongoing royalty payments.
The franchise relationship as defined by the franchise agreement can range from several years to a decade or more. In many cases, franchisors are companies that have assets and liabilities. Franchise assets are all the tangible and intangible assets or advantages that belong to the franchisor. On the other hand, franchise liabilities refer to what a franchisor owes third parties such as suppliers, creditors, internal employees, and other debts and obligations.
What liability does a franchise have?
There are several types of franchise business structures that a franchisor may choose to use. They can be publicly-listed corporations that have shares for trading on the stock exchange, limited liability corporations and others.
Different franchisors use different business structures and that is why it is difficult to answer the question: does a franchise have limited liability in simple terms. However, in most cases, franchisors follow a limited liability structure, which means that directors and owners are not held personally liable for the business’ liabilities should the business fail, be wound up or face liquidation and insolvency.
This means that there is a “corporate veil” that shields the franchise owners and directors from personally taking on the liability of the franchise business. That’s why the question of what liability does a franchise have is usually answered by focusing on the business structure of the franchise first.
Can a franchisor be held liable?
Staying with the discussion of what type of liability does a franchise have, especially the question of is a franchisor liable for a franchisee, there is no overarching legislation that governs the relationship in the UK, as mentioned already.
However, there may be cases when a franchisee’s employees bring an action against the franchisor by arguing that they are in essence employed by the franchisor. This is often substantiated in cases when a franchisor exercises excessive day-to-day control over the activities of a franchisee.
A second example of when the liability of a franchise may be tested refers to customers of the franchisee who may not have received the same standard in terms of products and/or services purchased or ordered. However, it is unlikely that a franchisor will be held liable for the franchisee’s mistake since a franchisor and a franchisee do not by nature have an agent agreement.
The third example of what liability do franchises have may relate to misrepresentation made by the franchisor to the franchisee. Although there are no legal requirements or obligations for a franchisor not to make misrepresentations, the BFA’s code of ethics generally prescribes that both parties should act in good faith towards each other.
What liability do franchisees have?
We now turn to the question of what liability franchisees have. Once again, this needs to be preceded by an understanding of the franchisee’s business structure. It may be a sole proprietorship, where they are personally held liable for the business’ liabilities. It may be a limited liability company, where they are not held personally liable for business liabilities. Or it may be a partnership, where a franchisee may be held liable for the acts or liabilities of their partner.
If we consider the situation of a franchisee operating as a limited liability company, it’s necessary to outline that franchisees and/or directors may have to provide personal guarantees based on their personal assets.
These directors also have important responsibilities to manage the business with due care and diligence expected from people in their positions. Also, directors have a duty to not trade if the business is being liquidated or to make false representations to creditors regarding the solvency of the business.
Who is liable for losses in a franchise?
Since a franchisee is often considered a separate business entity from the franchisor, losses incurred by a franchisee are and should be incurred by the franchisee. Also, as the franchisor will generally set expectations to be achieved by the franchisee, if these expectations are not met, the franchisor may choose to either take steps to assist the franchisee in carrying out their duties or they may choose to terminate the franchise relationship.
Furthermore, this raises the question of how franchisees are protected in the franchise relationship. The answer to this question will almost always be set out in the franchise agreement.
The franchise agreement sets out each party’s duties and responsibilities and clarifies obligations in various situations and eventualities that may arise. That’s why looking at what are the obligations of a franchisor to a franchisee should always be considered in the context of the franchise agreement.
What is the failure rate of franchises in the UK?
According to the BFA, franchises in the UK have a success rate of 97% while less than one percent fail. This is in stark contrast to independent start-up businesses, which have a significantly higher rate of failure, making franchising an attractive and lucrative business opportunity.
Conclusion
In this article, we’ve explored the aspects related to franchisor and franchisee liability. In essence, when it comes to what are the legal obligations of a franchise in the UK or what are the obligations of a franchisee, it’s important to always look at the specific franchise agreement in place.
In addition, whether a franchise is a limited or unlimited liability can be answered by looking at the business structure used by the particular franchise business in question. However, in most cases, they are limited liability companies, meaning that franchise liability coverage is also limited.
When it comes to selecting the right franchise opportunity for you, being aware of the legalities and liabilities of each party in the relationship is crucial. And if you are considering a franchise opportunity with the Belvoir Franchise Group, you can rest assured that you’ll get the right guidance when you get in touch with us. Operating through a separate limited liability company, as a Belvoir Franchise Group franchisee, you can run your business with greater confidence.
Speak to our friendly and helpful team and get ready to embark on a journey to business ownership that will lead you to success.
