The current climate has made us reassess the legal advice we give to franchisors and franchisees in Scotland, across the UK and internationally. Driven by some unique business features, and a dynamic that's quite different to other trading relationships, our focus when advising franchisees is on risk management.
There's a serious difference between a franchisor's invariably "non-negotiable" master franchise agreement and the real relationship that franchisees experience with a responsible franchisor. The franchisor needs consistency amongst its network of franchisees and to accept renegotiation of any of its standard terms is to run the risk of creating an unfortunate precedent, disrupting established relationships without the benefit of that concession and leading to the likelihood of "copycat" behaviour from future franchisees.
If the franchise contract is not going to be changed just to suit a particular franchisee's needs, then that franchisee must be briefed on the risks and how to manage them. Time and again, the acid test when advising on that has been for candidates to speak with existing franchisees. Indeed, many franchisors create a platform facilitating this level of collaboration.
All businesses operate in supply chains and, increasingly, sectors - and this is especially evident in the global food and drink market - are collaborating to improve supply chain management to meet increasing consumer demand and maintain competitive pricing. The COVID-19 pandemic has stress-tested levels of collaboration to almost unprecedented levels. As a result, some of the links in those supply chains have simply broken with factory closures stopping production, transport logistics failing or social distancing measures closing the point of sale to consumers in shops, supermarkets, bars and restaurants.
This is equally so of franchised businesses. Our risk assessment for franchisees (and franchisors, they bear risk too!) has evolved. Franchising is in part based on both parties sharing risk. For example, is there adequate demand in that territory to sustain a franchise there? There should be provision for force majeure in the franchise to limit liability for something like a pandemic, beyond a party's control, but those provisions will have been tested in the last few weeks, and some will inevitably have been found wanting.
When assessing the risk of a new relationship, we need, more than ever, to test beyond the contractual terms at the back of the document that get "left to the lawyers" and evaluate the real resilience of the franchisor's network and its own supply chain, both internal, like sustaining training and marketing, and external, if, say, key raw and other materials are sourced for franchisees. Franchising's secret ingredient, its key to success, is inherent mutual interest in the success of the franchise outlet. That's the different dynamic. Many business relationships will say that. But the franchised relationships that share a close partnership are those that work best. That is now an enhanced focus of our evaluation and advice.
Clients may feel frustrated by their solicitor's preoccupation with risk, and what could go wrong and fail, just when they are about to commit to a new relationship. But that's the point. Business interruption provisions in our contracts already provide for pandemics. That no longer causes amusement and now receives serious consideration.
The key point to take is that franchising is a compelling business model, embodying risk-sharing and collaboration between parties with common goals and the strength of that partnership is best tested by its resilience during times of crisis.
If you are considering starting a franchise, have a look at how well those in your chosen sector are adapting right now. Have they had to close or does their business model offer some flexibility, resilience and revenue?
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Senior Associate
