Franchising tips
Franchising is worth considering when you want to start a business but don’t have a particular business idea in mind. It is also beneficial when you want to piggy back on an established brand using your own business skills to maximise already established potential. It also offers some security of running with an establish business model, although there a number of potential drawbacks also with franchising.
What are the different types of franchise agreements ?
- Distribution agreements – where you sell another person’s product but trade under your own name. In such a case you have more freedom to run the business as you want.
- Agency agreements – where you sell another person’s product or service on their behalf
- Licensee – where the other person provides you with a right to make and sell their product. Here too there are usually few restrictions on how you run your business.
- However, the most popular form of franchising is through what is called a ‘Business Format Franchise”. This is where one person – the Franchisor – grants you a licence to use their business idea in a specific location, becoming the Franchisee.
As a Franchisee you would sell the Franchisors product or service trading under their trade name and in return you would receive their help and support in areas such as training, set up, product development, advertising & advice on running the business. They would also provide you with a complete package which would incorporate all the essentials necessary to start up the business. However, for these “benefits”, which are often compulsory, it is a common feature of a franchise agreement that in addition to paying a premium for buying the franchise there are above market rate charges payable for additional services or goods on an ongoing basis. Additionally, franchise agreements usually involve the franchisee having to pay a percentage of annual turnover.
Although the outlet itself is owned and operated by you, the Franchisor will keep control over the way in which the products or services are sold and marketed. They will also keep a watchful eye over the quality and standard of your business to make sure that it is running in a way that fits with their overall organisation and business ideas.
Before entering into any franchise agreement it is necessary to understand the advantages and disadvantages, as well as to know what you need to look out for before signing on the dotted line.
Advantages of a franchise
- You will be basing your business on a proven idea with a recognised brand name, thereby benefitting from any advertising or promotion by the Franchisor.
- The Franchisor will help you to set up your business and support you in several ways including training and advice.
- You will usually have exclusive rights to trade in a specific location, lowering the number of competitors.
- You will have access to established suppliers and other franchisee’s who can offer you advice and support.
Possible disadvantages
- Additional costs of the initial payment to the Franchisor along with a yearly management fee which will lower your profits.
- Restrictions on how to sell the product or service are usually included in the agreement which can stifle your business plans and ideas. This could include the need to follow their specific systems or procedures.
- Other franchisees may not be suitable and end up giving the franchise a bad reputation, having consequences on your business.
- When the franchise comes to an end or it is terminated, all goodwill that you will have built up in your location will have to be passed back to the Franchisor.
Due diligence before entering into a franchise arrangement
- Check whether the franchise you want to enter into is a proven business concept. How successful is it?
- It is essential that you speak to other franchisees of this particular product or service to see whether they are happy with the way the Franchisor handles them and what the level of support that they receive is.
- Check the location which you have been offered. Is there demand for that product or service? Is there a lot of competition in the area?
- Speak with your accountant – will you have enough profit to run a successful business and still pay the annual management fee or royalties?
- Check any agreement carefully. What kind of restrictions is the Franchisor trying to place on you?
- Will you be accepted as a Franchisee? Do you have a business plan that they will want to add you to their network of outlets?
- When you are sure you want to proceed and have chosen the franchise that you want to join it will then be necessary to enter into their franchising agreement. Long established Franchisors maybe unwilling to be flexible but that does not mean that you should simply agree to all terms without trying to negotiate.
We highly recommend that you seek experienced legal advice before entering into any agreement as it will be necessary to have advice on the practical implications of the terms you are agreeing to. It can be that after entering into such a contract and realising it is not beneficial for you, it can cost more to try and then terminate it.
How can commercial lawyers help with franchise agreements ?
Service levels and expertise will vary but advice can include :-
- Reviewing any agreement and advising on terms such as fees, location, restrictions and exit clauses.
- Negotiating with the Franchisor to amend the terms, making them more beneficial for you.
- Advising on general steps to be taken before, during and after an agreement is made.
- Where applicable, dealing with commercial property aspects of the premises you will be trading from.