Franchising is one of the quieter success stories of Britain’s modern economy. From food outlets and gyms to home-care providers and vehicle services, the model has allowed thousands of people to run their own businesses under established brands. For many aspiring entrepreneurs, it offers a halfway house between employment and full independence.
Yet behind this apparently thriving sector lies a huge regulatory gap.
Britain regulates most major industries in which individuals commit significant sums of money. Financial services are overseen by the Financial Conduct Authority. Advertising is monitored by the Advertising Standards Authority. Estate agents operate under specific legislation that has been in place for decades.
Franchising, by contrast, despite generating an estimated £20 billion in economic activity and supporting roughly 700,000 jobs, has no dedicated regulatory framework.
The majority of franchisors operate responsibly. Many have built successful networks based on genuine partnerships with their franchisees. But the absence of basic safeguards has allowed questionable practices to emerge and become increasingly widespread.
In some cases, individuals with criminal convictions have been able to launch franchise systems. In others, business models have been marketed aggressively without clear evidence that they can deliver sustainable profits. Convicted fraudsters sell ‘franchise in a box’ packages that enable anyone with a hare-brained business idea to turn it into a franchise and recruit franchisees. The failure of those who invest in these franchises is almost inevitable.
The danger is not merely the harm caused to individual investors. Left unchecked, such behaviour risks undermining confidence in the entire franchising model.
An Imbalance of Information
At the heart of the issue lies a simple but important imbalance of knowledge.
Entering a franchise agreement is rarely a modest commitment. Prospective franchisees are often required to invest heavily in premises, equipment and working capital. They may take on long-term leases, pay substantial initial franchise fees and commit to ongoing management charges.
They must also operate within strict parameters set by the franchisor, covering everything from suppliers and pricing to marketing and brand standards. Yet remarkably, UK law does not require franchisors to disclose whether their model has actually worked elsewhere.
A prospective franchisee can therefore commit thousands of pounds to a business system without seeing evidence that it has been successfully replicated. Other developed franchise markets have taken a different approach.
In the United States, franchisors must provide detailed disclosure documents before a contract can be signed. These documents set out fees, obligations, territorial rights and operational requirements. Where financial performance claims are made, they must be supported by evidence. California has some of the strictest regulations; it enjoys a low failure rate of franchisees and confidence in the business model is high.
Germany has developed its own approach rooted in contract law. German courts recognise that franchisors possess superior knowledge of their systems and therefore carry a duty to disclose information that could influence a franchisee’s investment decision. Failure to do so may lead to damages or the cancellation of the contract. As a consequence, franchising is respected as an excellent way of building a business and growing a brand.
UK franchising, by contrast, is unregulated. At best it relies on voluntary self-regulation through trade associations such as the British Franchise Association. Its ethical standards are widely respected, but membership is voluntary and the organisation has no formal regulatory authority. It represents about one third of the approximately 1,000 UK franchise brands. This leaves a significant gap between best practice and enforceable standards. As a result, the industry here is increasingly being brought into disrepute by cases such as the Post Office scandal and the Vodafone case that has recently been mentioned in the House of Commons.
A Practical Reform Agenda
The UK does not need a cumbersome licensing regime or government bureaucracy to regulate franchising. But it does need a framework that addresses the structural weaknesses that currently expose prospective franchisees to unnecessary risk. A sensible model would combine the disclosure philosophy seen in California with the contractual fairness principles embedded in German law.
Four targeted reforms could achieve this without stifling legitimate business activity.
Proving the Concept Works
The first step should be straightforward: franchisors should be required to demonstrate that their business model is commercially viable before selling franchises.
This does not mean guaranteeing success. No business model can offer that. But franchisors should provide evidence that the concept has been tested under real trading conditions.
Such evidence should include trading histories from pilot operations, profitability data from company-owned outlets, break-even analyses and proof that the model has been successfully replicated.
In other words, prospective franchisees should be able to see that the system they are buying into has already worked somewhere. It should be mandatory for prospective franchisees to be given access to all the existing franchisees. Further, franchisors should disclose the number of franchisees who have failed or ceased trading.
The Case for Territorial Protection
Territory is another area where reform is overdue. Franchising is based on the replication of a business model within defined markets and, traditionally, that was how it was always done. More recently a worrying trend has started to emerge in which franchisors sell non-territorial, virtual franchises. Without territorial boundaries, it is inevitable that franchisees will be forced to compete directly with one another. The only winner in this model is the franchisor who can sell hundreds or even thousands of franchises. The consequences are predictable: most franchisees will fail.
Requiring franchise agreements to define a clear operating territory would help align the interests of franchisors and franchisees. It would encourage responsible network expansion rather than aggressive recruitment.
The allocation of a defined territory should be mandatory.
Reforming Fee Structures
A third area requiring attention is the structure of management service fees.
Traditionally, in almost all franchise systems, these fees were calculated solely as a percentage of the franchisees’ sales revenue, excluding the VAT if that was applicable. Over recent years an additional element has been added that requires the franchisee to pay the percentage but with a minimum monthly amount. This means that even if the franchisee’s business is struggling, the minimum fee must still be paid.
This creates a damaging financial dynamic.
When revenues fall short of expectations, franchisees may be forced to divert working capital to meet fee obligations rather than investing in marketing, staffing or operational improvements. Over time this can accelerate financial distress. When the franchisee cannot continue, an exit payment is demanded based on the remaining monthly payments until the end of the term of the franchise agreement. This can be devastating to the franchisee who has already lost their investment.
A more balanced approach would be to link management fees solely to a percentage of sales revenue, removing fixed minimum charges. This would ensure that franchisors share in the economic realities faced by their franchisees. Their income would rise when franchisees succeed and fall when they struggle.
The result would be stronger incentives for responsible recruitment, effective operational support and disciplined network expansion.
Ideally, minimum monthly fees should be outlawed.
Reasserting Good Faith
Finally, franchise agreements should not be permitted to sidestep the fundamental principle of good faith.
Many franchise agreements grant franchisors wide discretionary powers over matters such as renewal, transfers, operational standards and marketing contributions. Some agreements now attempt to limit the legal obligation to exercise those powers fairly. We should follow the German approach, imposing a broad duty of good faith on contracting parties.
Embedding a similar principle in UK franchising law would not prevent franchisors from managing their networks effectively. But it would provide a safeguard against conduct that undermines the legitimate expectations of franchisees.
A Stronger Future for Franchising
Franchising remains a powerful mechanism for economic participation. It allows individuals to build businesses using proven systems while benefiting from brand recognition and operational support.
But the long-term success of the model depends on trust.
A framework based on transparent disclosure, territorial clarity, fair fee structures and an enforceable duty of good faith would strengthen that trust.
Such reforms would not burden reputable franchisors. On the contrary, they would help distinguish them from the minority whose practices threaten the credibility of the entire sector.
And in doing so, they would help ensure that franchising continues to offer a genuine pathway to independent enterprise in Britain.