Franchising is a great way to build a business fast.
If you’ve got an idea, a brand or an established business that can be scaled up quickly and across a wide area, you should consider franchising.
At its simplest level, franchising is an arrangement whereby you grant another person the right to use your name, brand and business method to sell specific goods or services, for a fixed period.
As the original brand owner you are called the franchisor. The person you give the rights to is the franchisee and the right granted is called the franchise. The franchisee will usually pay you an initial fee and royalties on sales or services during the life of the franchise.
As franchisor you maintain some control, but your franchisee is essentially running their own business. You can grant franchises as a single operation, or permit one franchisee to run multiple outlets and even grant sub-franchises to other businesses.
What’s in it for you?
You can potentially build a business across a wide area quickly, with a portion of the risk of that growth being transferred to the franchisee.
With a personal investment, the franchisee is likely to be more engaged in making the business a success (compared to employing staff to open new branches or outlets) in order to get a return on their investment (the franchise fee).
What does a franchise agreement look like?
The franchise relationship is governed by an agreement that sets out how everything will work.
There are many variants on this which will depend on the nature of your industry.
As franchisor, you will probably set most of the terms of the agreement and they will be standard terms across all the franchises you grant.
If you are based overseas, your potential franchisee may well know more about their local business market than you do - make use of this.
There are some general issues which are usually relevant to all franchises, and they appear below. You should consider how these affect you.
Distributing franchises fairly
It is usual to give individual franchisees autonomy over one geographical area. This is known as their ‘territory’.
You will find it harder to get people to sign up to your franchise if they feel that you are reducing the business they can get from your brand.
The extent of the area and the length of the franchise period should not be too onerous. Depending on your industry, you may need to provide premises.
How long are we going to be tied in for?
There is no standard term for a franchise – many factors may come into play. Five years is fairly typical (with the option to renew at least twice) but agreements can stretch to 10 or even 15 years.
Remember that you need to give the franchisee long enough to recover their investment (such as the initial franchise fee and any other set-up costs they may incur) and to make a profit for themselves.
Think carefully about your renewal terms. There is value for both parties in continuity, but make sure that such an option does not inhibit your plans for your brand and your business.
You must understand any clauses for early termination, and whether breaching any of the obligations you have as franchisor gives your franchisee the right to end the franchise early.
You will want the agreement to give you the right to terminate the franchise early in certain circumstances, but make sure that the stipulation is not going to deter a potential franchisee.
If the agreement gives the franchisee the right to surrender the franchise, consider whether there ought to be a cost for exercising it.
The right tools for the job
If you are expecting your franchisees to provide customers with a consistent service, it is your responsibility to give them the tools and support to achieve that.
You will probably need to provide the necessary training, equipment, stocks and marketing materials, and keep the operating manual up to date.
A well-kept secret
A successful franchise can’t be run without disclosure of your expertise and business processes. These are valuable assets and should be protected by confidentiality undertakings in the franchise agreement.
Manage your brand
To make sure the brand is properly managed and promoted, you will need to license trademarks or other intellectual property rights to your franchisees; this should be specified in the agreement.
Typically, brand advertising is handled by the franchisor.
Protect your brand’s reputation
As a franchisor you are putting your reputation on the line by handing some level of control over to a third party.
It’s important that the people you grant your franchise to are people you trust to grow and enhance your reputation. So be prepared to put in place clear processes to minimise the risk of your franchisees going astray.
This usually involves compiling a comprehensive manual.
Who needs a manual?
You do. The success of the business may depend on it.
As franchisor you need to be sure it is complete, current and properly adhered to. You also need to set clear targets for reporting compliance with it.
Your manual should cover:
- business hours
- customer experience and standards
- reporting procedures
Sales – what it’s all about
Everyone is going into this franchise arrangement with the expectation that they will be able to make a profit.
You may well want to set revenue targets for the franchisee, or to set a requirement that in bidding or applying for the franchise the franchisee has to put together their own projections.
If you have set them, you will probably need to demonstrate to the franchisee that the targets are achievable, based on your own projections and market research.
Be prepared to share commercially sensitive information with potential franchisees, which you should protect by requiring them to sign a non-disclosure agreement (NDA).
Make it clear what the result of not meeting commercial targets may be - especially if there might be financial penalties or a possible early termination of the franchise.
Now go and spread your business!
Get your free guidance on all the various ways you can run a business without lawyers at www.simplifythelaw.co.uk