Buying a franchise: Check the network’s ethical commitments

Membership of a franchise association, a quality mark or a reference to a code of ethics can offer reassurance when you are considering buying a franchise. But these signals do not necessarily tell you what rights you will have. Franchising brings together independent businesses, and shared rules are valuable when their content and implications are clear. Here is a way to investigate a network’s ethical commitments before relying on them in your decision.

Distinguish between the law, membership and the agreement

Denmark has no specific franchise legislation, no mandatory franchise-specific disclosure package and no compulsory registration scheme for franchisors or franchise agreements. This does not mean that businesses are exempt from ordinary business registration requirements. It means that membership of a franchise association is not official authorisation to offer the franchise concept.

Franchise agreements are assessed under the Danish Contracts Act and general principles of contract law. The Danish Competition Act and Marketing Practices Act, among other legislation, may also be relevant. General legal principles also impose duties of loyalty and disclosure, which may require material information to be disclosed, depending on the circumstances. The absence of franchise-specific rules therefore does not give businesses a free hand to mislead a buyer.

Alongside legislation, the franchise sector has self-regulatory arrangements, including the European Code of Ethics for Franchising. Such a code is not Danish law. Its significance depends, among other things, on whether the franchisor is bound by it through membership and whether its rules form part of your agreement.

Keep three questions separate: What does the law require? What does the membership organisation require? And what specific commitments has the franchisor made to you?

Check who the membership covers

Start with the legal entity that will sign your franchise agreement. A familiar brand name may cover several companies, and membership held by a parent company or an overseas rights holder does not necessarily extend to the company you will be contracting with.

Ask for the following information:

• The name of the membership organisation or the organisation behind the quality mark.
• The name and company registration number of the member company.
• Confirmation that the membership is current.
• The current code and membership terms to which the franchisor refers.
• An explanation of which activities and countries the membership covers.

Then verify the information directly with the organisation. Also ask what admission to membership involves. Does it mean signing up to a set of principles, a review of particular documents or ongoing monitoring? Do not fill in the gaps yourself by assuming that the entire business model has been examined.

Nor does membership in itself demonstrate that your particular location can be profitable. It is no substitute for financial due diligence or legal advice.

Find out how the code works in practice

Read the rules with a focus on specific actions rather than statements of values. References to integrity, cooperation and transparency can provide useful guidance, but you need to investigate what they mean in practice.

Create a simple table with three columns: rule, responsible party and follow-up. If, for example, the code addresses the handling of disputes, you should be able to identify who receives a complaint and how it is dealt with. If it sets out particular standards for the working relationship, ask how the network monitors compliance with them.

Pay particular attention to access to complaints procedures:

• Can you raise a complaint as a franchisee, or is the scheme only open to members?
• Does the scheme cover matters arising before the agreement is signed, or only the subsequent relationship?
• Are there time limits, fees or requirements to complain internally first?
• Can the organisation issue decisions, or does it only facilitate dialogue and make recommendations?
• What action can be taken if the rules are breached?

Do not assume that an organisation can award you compensation or amend the franchise agreement. Action relating to membership and a civil legal claim are different things. If a complaints scheme exists, you should also clarify whether using it affects other ways of enforcing your rights.

Decide how the rules should influence your purchase

Once you understand the scheme, you can assess how much weight to give it when choosing a brand. A clear code with an understandable follow-up process can be a positive sign. A logo without supporting documentation, however, should not be treated as an assurance in its own right.

If particular ethical commitments are crucial to your decision, a specialist franchise solicitor should assess how they are incorporated into the agreement. A general reference to a code may leave uncertainty about the applicable version, its scope and its relationship with other contractual terms.

Also clarify what happens if the franchisor leaves the organisation, loses its membership or the code changes. Must you be notified? Will the agreed standards continue to apply between you? These are matters for negotiation, not rights you can automatically rely on.

Practical rule of thumb: Verify the membership, read the rules and investigate how they are followed up. Treat ethical commitments as a specific factor to assess when choosing a franchise network — never as a substitute for carrying out due diligence on the purchase itself.