How Can A Franchisee Business Obtain SEIS and EIS Advance Assurance

Obtaining SEIS (Seed Enterprise Investment Scheme) or EIS (Enterprise Investment Scheme) advance assurance for a franchisee (a business operating under a franchisor’s model) can be challenging but is not impossible.

Franchisees are generally more restricted in their ability to qualify because they often operate under an established business model with limited independence, which may conflict with SEIS/EIS eligibility criteria. However, there are ways to structure the franchisee’s business to improve the chances of obtaining SEIS/EIS advance assurance.

Key Considerations for Franchisees

1. Demonstrate Independence:
   • The franchisee must show that it operates as an independent company with its own growth and innovation potential.
   • While the franchisee uses the franchisor’s brand and model, it must make clear that it is responsible for its own strategic decisions and operations.
   • Highlight how the risk to capital condition is met in that the franchisor’s support is limited and is no guarantee of success.
2. Avoid Revenue from Excluded Activities:
   • Ensure that the franchisee’s activities do not fall into SEIS/EIS excluded categories, such as:
     • Leasing or letting property.
     • Financial services or money lending.
     • Gambling or betting.
   • For example, a restaurant franchisee might focus on selling food and drinks, which are typically eligible activities.
3. Growth and Scalability:
   • Highlight how the franchisee plans to scale its operations. This could include opening additional outlets under the franchise agreement or developing complementary revenue streams.
   • Emphasise job creation and potential for future economic contribution.
4. Use of Funds:
   • Clearly specify how SEIS/EIS funds will be used for qualifying purposes, such as:
     • Purchasing equipment.
     • Marketing and promotion to attract new customers.
     • Hiring staff.
     • Developing local adaptations of the franchisor’s model (e.g., customising services or products for the local market).
5. Stay Within Qualifying Criteria:
   • The franchisee must meet SEIS/EIS criteria, such as:
     • Having gross assets under £200,000 (for SEIS) or £15 million (for EIS).
     • Employing fewer than 25 people (for SEIS) or 250 people (for EIS).
     • Being less than three years old (for SEIS) or seven years old (for EIS) (with exceptions).

Challenges for Franchisees

1. Perception of Low Innovation:
   • Franchisees are often seen as operating under a pre-defined, non-innovative business model. To counter this, the franchisee must demonstrate how it is innovating locally or contributing to the overall growth of the franchise network.
2. Overdependence on the Franchisor:
   • Franchisees relying entirely on the franchisor’s business model and revenue streams may struggle to qualify. The application should emphasise the franchisee’s independent management and growth potential.
3. Revenue Sharing:
   • If a significant portion of the franchisee’s revenue is paid to the franchisor as royalties or fees, this could be viewed as a limitation on the business’s growth potential.

Steps to Improve Eligibility for Franchisees

1. Draft a Strong Business Plan:
   • Clearly outline how the franchisee will use SEIS/EIS funds for growth and innovation. Highlight job creation, scalability, and local market strategies.
2. Emphasise Qualifying Activities:
   • Ensure the franchisee’s primary activities fall within SEIS/EIS-eligible categories and minimise involvement in excluded activities.
3. Demonstrate Local Innovation:
   • If the franchise model allows, showcase local adaptations or innovations (e.g., introducing new products or services tailored to the market).
4. Seek Professional Advice:
   • Work with tax advisors or legal professionals experienced in SEIS/EIS to ensure the franchisee’s application complies with HMRC rules.
5. Engage HMRC in Advance Assurance:
   • Submit a detailed application for advance assurance to HMRC, including:
     • A clear business plan.
     • Financial forecasts.
     • Evidence of independent operations.
     • Explanation of how the franchisee meets SEIS/EIS criteria.

Example Scenario

A local franchisee of a health food café chain:

• Plans to use SEIS/EIS funds to open a second location, hire staff, and invest in local marketing campaigns.
• Demonstrates innovation by introducing regionally sourced menu items and offering new services like catering.
• Operates independently of the franchisor, making decisions about hiring, supply chains, and marketing strategies.

By emphasising independence, growth potential, and eligible activities, this franchisee may qualify for SEIS/EIS advance assurance.

Conclusion

While franchisees face unique challenges in qualifying for SEIS/EIS, it is possible with careful structuring and planning. Emphasising independence, scalability, and innovation while ensuring compliance with SEIS/EIS rules is critical. Professional advice and a well-prepared advance assurance application can significantly improve the chances of success.

How we can help

If you require help, we offer a no-cost, no-obligation 20-minute introductory call as a starting point and in some cases where appropriate, a fixed fee appointment.

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible. After this call, we can then email you a scope of work, fee estimate, and confirmation of any other points or information mentioned on the call.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.