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The Impact of Brexit on Franchising And How to Manage The Transition Successfully

The Brexit vote, and subsequent triggering of Article 50 back in March 2017, has caused significant uncertainty for franchisors and franchisees operating in the UK.

Understanding how the legal landscape might change and being ready to adapt after the UK leaves the EU will be crucial for any business to navigate the transition successfully. That said, the legal landscape remains uncertain at present.  

Where Brexit Will Have The Biggest Legal Impact?

Most franchising agreements will be governed by the laws of the country in which the franchise operates, so it is unlikely that they will be impacted by Brexit unless incorporating particular EU trade regulations or laws. It is further unlikely that as part of the exit process that the well-established principles of contract law embedded in the laws of England and Wales will be impacted by Brexit.

Although there are no specific ‘franchising laws’, there are several key areas of legislation which have their routes in EU law and may be impacted once we leave the EU, such as:

  • EU competition law

Franchising benefits from a vertical exemption, derived from EU competition law, that allows franchisees to benefit from the setting of lower prices, territorial protection and access a supply chain that may otherwise be prohibited to SMEs (within certain parameters) where that trading relates to EU member states.   This can often provide franchisees with a competitive edge over other business owners.  Competition laws are mirrored within the domestic Competition Act, limited to trade within the UK.  However, exiting the EU may find that the flexibility within EU rules is lost.

  • Data protection

Many laws relating to data protection are derived from the EU.  The introduction of the GDPR, the biggest shake up for a number of decades, may continue to apply even once we have left the EU.  It will apply to any entity that processes personal information about European residents or monitors their behaviour so Brexit is unlikely to mean that businesses do not need to arm themselves with an undertaking of how the GDPR impacts them.

  • Intellectual property rights

One area of great concern for franchisors who have carefully developed a brand, is the protection of IPR.  At present, franchisors can apply for a single European Trade Mark to protect a trade mark and design, which is likely to be lost once we exit the EU.  There may be an additional layer of costs in maintaining two regimes under the UK and EU.

  • Employees

Many employee rights are also derived from EU law, however, the EU sets minimum requirements that are generally enhanced by UK law at present. 

For business owners, the concern is likely to be how Brexit impacts freedom of movement, if at all, and their ability to recruit the right talent and skilled workers.

  • Health and safety , and environmental law  

A volume of UK food hygiene, health and safety and environmental laws are based upon EU directives and regulations.  Many are already embodied in UK law and unlikely to be repealed but developments within either respective body of law may impact those businesses with a European reach.

Broadly there is EU legislation that is directly applicable such as regulations and treaty provisions, without the need to be transposed into UK legislation, and that which is only operative, such as directives, once implanted via domestic UK legislation. The latter will be unaffected by Brexit as enshrined in UK law, unless repealed or amended, the former will cease to apply unless Parliament passes domestic legislation. 

The process of transferring EU law across into UK domestic law will not be straightforward. Changes to laws – particularly any divergence of obligations and regulations –could have an impact upon franchisors and franchisees in the UK where there is an international or European element, and businesses may need to prepare for having to comply with two different, and potentially, competing legislative frameworks.

Top tip: it is sensible for both franchisors and franchisees to start a dialogue of how to prepare for the impending changes to the legal and commercial landscape, once the UK has left the EU. Both are likely to provide valuable insight in how the business can adapt.

Look at Your Supply Chain

Businesses must consider their own supply chain, and the movement of goods to and from the EU.

At present, UK franchises benefit from a single market that enables to sell products and services to customers around the EU without having to pay additional taxes or tariffs.  Whether that will remain following the relationship with the EU having been severed is unknown, and businesses may need to plan for the increase in costs of selling their goods or services. For many franchisees this may not practically impact them, depending upon how their territory is defined within the franchise agreement.

Review your supply chain to determine how reliant you are on products or services from the EU.  Following Brexit, there may be uncertainty about the cost of sourcing products. For example, how much will ingredients from the continent cost?  Either franchisees will absorb cost increases or pass it on to consumers. Some franchises might have their prices fixed by their franchise agreement, taking the decision out of their hands. 

Top tip: Review your franchise agreement and plan ahead – think about how you might be able to absorb increases in costs and the impact this will have on your profits. If you can increase your prices, consider what this might do to consumer demand. Also think about what your competitors are likely to do.

Consumer Behaviour And The Economy

Many franchises rely upon consumers to generate a profit and potential franchisees may be nervous about entering into the market place whilst there is uncertainty about the pound and the financial stability of the economy. The drop in the pound has also seen an increase in interest by US and Canadian franchisors to launch in the UK market, thereby increasing the opportunities on offer.

For those looking to enter the franchise market, it is sensible to explore with a franchisor how they plan to adapt their business model to the changes in the market place, and how a franchisor anticipates the target audience for a product or service being impacted, if at all.

Market uncertainty may also impact upon banks’ willingness to lend, which is essential for new franchisees. Uncertainty surrounding the impact of Brexit on the UK economy could make franchising a less attractive prospect in the UK and slow growth.  However, the good news is that banks remain positive about funding.

Top tip: Book an appointment at your bank to see what funds would be available to you for taking on a franchise and see what support the franchise can offer you too.

Slater and Gordon Lawyers have expertise in franchise disputes, corporate and commercial legal advice and intellectual property. To find out how our business legal services team can help you call us on freephone 0800 916 9052 or contact us online.

Rebecca Young is dispute resolution lawyer with expertise in franchising. She works from the Slater and Gordon Manchester office.

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