Is a franchise really my own business?

Buying a franchise can feel like a fast track to running your own business, but is it really your own? While you get access to a proven business model, established branding and support, running a franchise comes with rules, restrictions and legal obligations that set it apart from a completely independent business.

Understanding the realities of franchise ownership is essential before you invest. Here, experts in franchising and law break down what you need to know to make an informed decision about a franchise opportunity...

What’s the difference between a franchisee and a franchisor?

There’s often confusion about the roles within a franchise, so it helps to clarify who does what. Brian Duckett, former chairman of The Franchising Centre, explains: “There is only one ‘franchise owner’ and that is the franchisor. This is the business that developed the concept that’s the subject of the franchise. It owns the rights associated with that concept.”

Franchisees, by contrast, operate local clones of the proven business model under a lease-like arrangement. “In essence, the arrangement is system leasing. Like any other lease, [you] will be allowed to continue operating the lease provided [you] stay within its terms during the relevant period,” Duckett says.

The franchisee runs their own business within a defined territory, following the franchisor’s operating system and receiving ongoing guidance, in exchange for fees.

If I invest in a franchise, is it really my own business?

Duckett explains that while your franchise is technically your own business, it comes with important caveats.

“If you create a company or become a sole trader in order to set up a business that operates under the name of and uses the business system belonging to a franchisor, then that business entity does indeed belong to you and is therefore your own business.”

However, Duckett stresses that operating a franchise is not the same as complete independence. “Your business exists solely in order to operate a local outlet of the franchisor’s business. It must always operate in line with all the requirements of the franchisor’s system as laid down in the operations manual.”

This means you cannot act entirely at your discretion. Abusing the system can result in losing the right to continue operating.

The upside, he adds, is access to a proven business model “that has previously demonstrated success in a number of places. Provided you follow that system, you should be successful too.”

Is it best to set up a limited company?

Choosing the right structure for your franchise isn’t just a box-ticking exercise – it can have real consequences for your day-to-day running and your financial exposure.

John Pratt, senior partner at specialist law firm Hamilton Pratt, outlines the options: “If you are a sole trader then there are no formalities in starting to trade. If more than one of you wants to operate the business, then it may be that you will operate as a partnership. In terms of formalities, the most complex is to set up a limited company.”

While a limited company may sound appealing, it comes with extra responsibilities. “Each company must have at least one shareholder and one director,” Pratt notes, “and the downside is that you have to prepare annual accounts as well as comply with other annual formalities.”

On the plus side, limited liability companies protect individuals when dealing with third parties such as suppliers and customers, although they do not remove your personal liability to the franchisor.

Pratt warns that many new franchisees underestimate the impact of tax and liability considerations. “Ultimately, most people make a decision on structure based on the tax position. This is complex and is really an area where you need some good accountancy advice.”

Who owns the client list in a franchise?

John Pratt clarifies the distinction between clients and the client list. “Clients, as opposed to client lists, do not belong to anyone. Clients are free to purchase goods or services from whoever they choose.”

However, franchisees are usually contractually restricted to dealing with clients through the franchise. “As for the client list, that belongs to the franchisee who has prepared it.

“Again, this is subject to the terms of the franchise agreement. This would normally require the franchisee to make the client list available to the franchisor, subject to any data protection legislation.”

Lists may need to be handed over both during the term of the franchise and on termination. This allows the franchisor, neighbouring franchisees or a new franchisee to contact clients.

Conclusion

Investing in a franchise gives you the opportunity to run your own business within a proven system, but it is not the same as complete independence.

Understanding your legal position, the responsibilities to the franchisor and the structure of your business is essential.

Getting professional advice, carefully reviewing the franchise agreement and understanding the operational rules of the system are key steps to ensuring your franchise venture succeeds.