Understand the Legal Structure of a Franchise

Franchises just like any other business entity can be set-up with a number of business formats. Before you choose which format would be the most suitable for your particular franchise business, it’s a good idea to ensure you understand the unique aspects of the franchise format itself.

Master franchisor

Some of the larger international franchises can have complex logistical set ups, but what you have to remember as the franchisee is that the person you buy your franchise license from may not be the overall owner of the franchise business. These are usually privately owned companies, but can in some instances be public companies as well.

Many of the most successful franchises are based in the USA. The master franchisor is, therefore, the company that owns the intellectual property to the franchise format. Understanding the overall structure of the franchise business you are buying into is commercially astute so you understand how you as franchisee fit into the overall company structure.

Franchisor

This is the person or organisation you as the franchisee have the closest relationship with. The franchisor will have the authority to sell the franchise format in their particular country or territory as set out by the master franchisor.

It is in the franchisor’s interest to offer you as a potential franchisee all the information you need to make a decision to buy a new franchise branch. It’s rare for a franchisee to have much contact with the master franchisor, as all communication goes the regional franchisor. The franchisor will often be a privately owned company, but can also be a public company in some instances.

Franchisee

You are the franchisee in the franchise hierarchy. What kind of business format you choose will depend on the franchise itself as the market you are selling to can often determine the best type of business format to use. Sole traders, partnerships (limited and unlimited) and private companies (limited) are the traditional choices of business format for the actual legal structure of a new franchise.

Intellectual property

The most important component of a franchise is it's intellectual property. The overall branding, business idea, unique process or whatever makes the franchise stand out from the other business to give it a unique selling point is the foundation of the franchise as a whole.

It’s important to understand that as the franchisee you do not own any of the intellectual property in your franchise. This is ultimately owned by the master franchisor. However, because intellectual property law varies across the world, you may find that the master franchisor has a subsidiary in your country that they use to protect their intellectual property in your region.

You may have no legal right to the intellectual property in the franchise you buy, but you will be expected by the franchisor in your country to take all possible steps to protect the overall intellectual property of your franchise.

Franchise business structure

From a legal standpoint your lawyer will be able to give you advice on the best business format for the type of franchise you are running. For instance if your franchise is run part time from your home, it’s unlikely that you will need to form a limited company. But talk your options through with your legal advisors, as you may not have considered a business format that could have other advantages such as lowering your tax liabilities.