Advice

The term 'franchising' has been used to describe many different forms of business relationships, including licensing, distributor and agency arrangements. The more popular use of the term has arisen from the development of what is called 'business format franchising.'

Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis.

The principle is simple - some companies choose to grow, not by developing in the conventional way, but by granting a license to others to sell their product or service. There are clear advantages to this:

Each business outlet is owned and operated by the franchisee. However, the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business.

The franchisor will receive an initial fee from the franchisee, payable at the outset, together with on-going management service fees - usually based on a percentage of annual turnover or mark-ups on supplies. In return, the franchisor has an obligation to support the franchise network, notably with training, product development, advertising, promotional activities and with a specialist range of management services.

One of the bfa's main jobs is to help potential franchisees recognise the good, the bad, and the ugly for what they are. Another is to help businesses involved in franchising to secure their own position amongst the "good" operators. This work is not just a philanthropic exercise for reputable and responsible franchisors. It makes good commercial sense. The ability of franchisors to attract potential franchisees to invest in their systems depends crucially on their own reputation, and on the reputation of franchising in general. It was for these reasons that in 1977 the major franchising companies in the UK decided to set up their own association, the bfa, to act in the interests of the industry as a whole in assessing and accrediting franchising companies as those which meet its criteria for the structure of the business, the terms of the contract between franchisor and franchisee, the testing of the system and its success as a franchise. In the early days, franchising was concentrated in a limited number of markets, predominantly fast food, motor distribution and hotels with a degree of uniformity in each section's structure and operation. Now at least 20 different business sectors are represented with insurance services, hairdressing to quick print and design, and video rental to roof thatching. Each business has its own variety of characteristics and its own pitfalls. Against this changing background, the bfa has developed standards to ensure that potential franchisees can continue to give credence to bfa accreditation.

This Extension and Interpretation forms an integral part of the Code of Ethical Conduct adopted by the British Franchise Association and to which its members adhere.

1. This Code of Ethical Conduct forms part of the membership agreement between the British Franchise Association and its member companies. It does not form any part of the contractual agreement ' between franchisor and franchises unless expressly stated to do so by the franchisor in the franchise agreement. Neither should anything in this Code be construed as limiting a Franchisor's right to sell or assign its interest in a franchised business.

2. The objectivity of recruitment literature (Clause 3.2) refers specifically to publicly available material. It is recognised that in discussing individual business projections with Franchisees, Franchisors are invariably involved in making assumptions which can only be tested by the passage of time.

3. For the generality of this Code of Ethical Conduct, 'know-how' is taken as being as defined in the European Block Exemption to Article 85 of the Treaty of Rome. However for the purposes of Article 3.4 of the European Code of Ethics it is accepted that franchisors may impose non-competition and secrecy clauses to protect other information and systems where they may be reasonably regarded as material to the operation of the franchise.

4. Franchisors should seek to ensure that they offer to franchisees contracts in a language in which the franchises is competent.

5. In suggesting in Article 5.4 of the European Code of Ethics that the minimum term for a franchise contract should be the period necessary to amortize those of a franchisee's initial investment which are specific to the franchise, it is recognised: (a) that for a minority of the largest franchise opportunities amortizing initial investments may not be a primary objective for the franchises. In such cases the objective should be to adopt a contract period which reasonably balances the interests of the parties to the contract. (b) that this section could be subject to national laws concerning the restraint of trade and may need to be met through renewal clauses.

6. The basis for contract renewal should take into account the length of the original term, the extent to which the contract empowers the franchisor to require investments from the franchises for relinquishment or renovation, and the extent to which the franchisor may vary the terms of a contract on renewal. The overriding objective is to ensure that the franchisee has the opportunity to recover his franchise specific initial and subsequent investments and to exploit the franchised business for as long as the contract persists.

7. This Code of Ethical Conduct comprising this Extension and Interpretation and the European Code of Ethics for Franchising was adopted by the British Franchise Association, replacing its previous Code of Ethics on 30th August 1990, subject to a transitional period for full compliance ending 31st December 1991. During the transitional period members of the Association are nonetheless required to comply at least with the Code of Ethics previously in force. In October 1991 the Association agreed with the European Franchise Federation some amendments to the Code agreed in August 1990 and at the same time extended the transitional period to full compliance to 31st December 1992.

If you would like more information about the work of the bfa please contact the bfa email mailroom@thebfa.org A full list of bfa members can be found on the Directory of Accredited Members and Advisors.