Introduction

Franchising is a strategic alternative to agency and distribution models, offering businesses a scalable and cost-effective way to grow their brand without taking on the full burden of new operations. By leveraging third-party investment and effort, franchising enables rapid expansion while still retaining central control over brand identity, systems, and quality. For businesses looking to grow with minimal capital outlay and maximum reach, franchising offers a compelling option – but only when structured properly from the start.

What is a franchise?

A franchise is a legal arrangement in which a business owner (the franchisor) grants another party (the franchisee) the right to operate a business under its brand. In return, the franchisee pays for the use of intellectual property, systems, and support that are central to the franchisor’s established model.

This package typically includes:

· Branding and trademark rights.

· A tested business model.

· Ongoing quality control by the franchisor.

· Initial and continuing support from the franchisor.

· Ongoing marketing and quality oversight.

The aim of a franchise is to empower a franchisee, often with no prior industry experience, to run a profitable unit that reflects the success and standards of the broader brand.

How does it work in practice?

Franchise relationships are built on a carefully structured balance of independence and control:

The Franchisee:

· Gains the right to use the franchisor’s brand, systems, and intellectual property

· Pays initial and ongoing fees (such as royalties and contributions to a marketing fund)

· Operates their unit as an independent business, but within strict brand guidelines

The Franchisor:

· Provides training, operational guidance, and access to supply chains

· Maintains quality control and brand consistency across all franchise outlets

· Offers marketing tools and ongoing business support

In many cases, a pilot franchise is established first. This trial run allows both parties to assess the commercial and legal viability of the franchise model before rolling it out more broadly.

Types of Franchise Agreements

Franchising is not one-size-fits-all. There are different legal structures, depending on the scale and ambition of the business:

· Franchise Agreement – Grants rights to operate a single unit.

· Master Franchise Agreement – Grants rights to operate and sub-franchise within a larger territory.

· Development Agreement – Allows the franchisee to open multiple units over a defined period.

Benefits and Risks of a Franchising

When well-planned, franchising can unlock significant value for a business. But without proper legal and commercial foundations, it can just as easily expose the brand to risk.

Key Benefits:

– Faster expansion. Enables franchisor to secure distribution for products or services faster than having to develop its own internal marketing, sales and distribution channels.

– Expansion without capital investment. The franchisee’s capital will facilitate the expansion of a network without the franchisor’s funds.

– A Win-Win. Both parties have reciprocal incentives to perform, as the franchisee’s financial position is dependent on the success of the franchisor’s business and vice versa.

– Opportunities to reduce costs. A franchisor may be able to increase profitability of small units, as they have purchasing power and likely reduced overheads.

Risks:

– Loss of control. Ultimately the franchisee is still an independent third party, seeking to maximise their profits sometimes at the expense of the franchisor.

– Sharing of profit element. Part of the franchisor’s profit element is used in supporting the franchisee in the distribution chain.

– Risk of sharing valuable know how. Although this will be restricted in the franchise agreement, in practice it is difficult to monitor and enforce how IP will be used.

– Reputation management. A franchisor’s brand may be more susceptible to damage, as brand damage by one franchisee can impact the wider network.

Legal and Financial Considerations

Franchising is a long-term legal relationship and one that should never be entered into lightly. A poorly drafted franchise agreement can create enduring liabilities or erode brand value over time.

Before you commit:

· Understand disclosure obligations: Many jurisdictions require formal disclosure of key financial and operational details before a franchise agreement is signed.

· Get the agreement reviewed: Every franchise agreement should be professionally reviewed to ensure it protects your interests and reflects commercial realities.

· Plan for the full lifecycle: This includes the initial term, renewals, dispute resolution, and exit strategy — all of which should be clearly set out in the agreement.

For guidance on drafting or reviewing a franchise agreement, or structuring your franchise model, our team at Berry Smith is here to help.