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Does a franchisor legally have to operate a pilot scheme before launching a franchise?
A pilot scheme is where a franchisor trials its franchise business model with an independent ‘pilot’ franchisee rather than through a company operated outlet. The intention is that a pilot scheme will allow the franchisor to assess whether its business can be successfully franchised and operate as an independent business. It is essential that feedback is given by the ‘pilot’ franchisee with the pilot scheme usually being operated for a fairly short period of time. The pilot scheme is also usually closely monitored by a franchisor, with the franchisor and franchisee working closely together to iron out any wrinkles in the franchise business model before it is offered to other franchisees. There is no legal obligation for a franchisor to operate a pilot scheme before it offers a franchise of its business to a franchisee. However, the British Franchise Association, which is the self-regulating body of the UK franchise industry, has a code of conduct that promotes ethical franchising that many franchisors comply with. The BFA adopted the Code of Ethical Conduct (Code) based on the equivalent European Code. The Code provides a practical set of guiding principles and essential provisions of fair behaviour for franchisors. The Code is not legally enforceable. Although the Code provides that the franchisor should operate its business concept with success, for a reasonable time, in at least one pilot unit before starting its franchise network (Principle 2.2), it does not form part of the contractual agreement between a franchisor and franchisee unless expressly stated in the franchise agreement. It only forms part of the membership agreement between the BFA and its member franchisors. In practice it is sensible for a franchisor to show that the franchised business can be run successfully as an independent business through a pilot scheme, because any prudent potential franchisee is unlikely to want to invest in a business if it cannot be shown to be financially and commercially viable.
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Yes via third parties, both bank finance and asset finance
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