Overview of franchising: Franchisees

franchising: incredible!

If you think you have the skills and determination to run a business, and want to capitalise on a brand that already has recognition or growth potential, then maybe running a franchise is the way to go.

At its simplest level, franchising is an arrangement someone else grants you the right to use their name, brand and method to sell specific goods or services, for a fixed period.

The original brand owner is called the franchisor; you, as the person who gets to use it, are the franchisee; and the right granted is called the franchise. You will usually pay an initial fee – the franchise fee – and royalties on sales or services supplied during the life of the franchise.

Essentially you will be running your own business, but you do so subject to various controls set by the franchisor. As franchisee you may be granted a solo operation or multiple outlets and may even be able to grant sub-franchises to other businesses.

Well-known franchises include Pizza Hut Delivery, Subway, Horizons Travel and Benetton.

What is in it for you?

You have an opportunity to quickly start a business that is already operating in other areas of the country or the world. You have the comfort of a proven concept and information and systems that would otherwise take time to develop, and the ongoing sales and marketing support that most franchisors offer.

Although there is a level of outside control from the franchisor, the risk of failure may be lower and the extent of the initial investment is likely to be less than starting a similar business from scratch. 

All that security and advantage, though, comes at a cost. On-going franchise fees or franchise royalties add to the cost of running a business, which you don’t have to meet in other business models.

What does a franchise agreement look like?

The relationship is governed by a franchise agreement that sets out how everything will work. There are many variants on this, which will depend on the nature of your industry.

You will probably have limited room for manoeuvre when negotiating the agreement. But if the franchisor is overseas, you may well know more about the business than they do.

But there are some general matters which are usually relevant, and they appear below. You should consider how these affect you.

Above all, remember that this is a contract and you need to be sure what you are getting before and after you sign up.

Someone else is doing business on my patch

What’s the territory of your franchise?  It is usual for the franchisor to agree not to appoint another franchisee in the same geographical area. But that is not always the case: so be sure what the potential impact of that might be.

It is probable that the agreement will prevent you from making unfair use of the knowledge you have acquired by opening a similar business in the area for a period after the franchise has ended. Make sure that the area is not too great, nor the period too long.

Do premises come with the franchise? Often they are provided by a franchisor – for example when a fast-food outlet is taken over by a new franchisee. 

Other business types may not have particular premises, but the franchise agreement might specify a general or particular location for the franchise to be based.

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 or ten years are typical. You should not sign up for something that does not give you a good prospect of recovering your investment and making the profit that you need.

Try to have the option to extend the franchise written into the agreement. If business is good, you’ll want to hang on to it. 

Conversely, make sure you understand any clauses for early termination, and whether breach of any of the obligations you have as franchisee gives the franchisor the right to end the franchise early.

If you want to end early for commercial reasons, bear in mind that there may be a financial penalty for doing so provided in the agreement.

Protect your franchisor’s reputation

You will be responsible for the franchisor’s reputation and the goodwill associated with their business. So expect the franchisor to be set exacting standards.

They will have put in place clear processes to promote those standards, and they will most likely be set out in a comprehensive manual.

Who needs a manual?

You do.

The success of the business may depend on it. Apart from your contractual obligations, it makes sense that you will get the best out of the business by following a proven path. Your manual will give you processes or instructions for dealing with:

  • staff
  • Pricing
  • business hours
  • advertising
  • customer experience and standards
  • reporting procedures
  • training.

If the franchisor keeps the manual up to date – and they should! – make sure you are always following the current version and that all your staff are aware of changes.

Things you can’t run your franchise without…

If you are running a franchise, you need to be able to identify yourself with that franchise’s brand. You may need trade marks or other intellectual property rights licensed to you; and the agreement would usually specify this.

If a franchise is expected to provide customers with an experience which is the same as they get from all other franchisees, there are support responsibilities on the franchisor. Training, equipment, stocks and marketing materials and the content of a manual would usually be provided by the franchisor under the agreement.

Typically, brand advertising is handled by the franchisor.

A well-kept secret

A franchise can’t be run without the franchisor’s expertise – their knowhow – and knowledge of their business and processes. You will need these, but you will have to treat them as the valuable assets they are.

The franchise agreement will almost certainly contain confidentiality undertakings. But even if it doesn’t, there will still be a duty of confidentiality between franchisor and franchisee, and you should not disclose any sensitive information to third parties.

Sales – what it’s all about

Had you forgotten?

Everyone is going into this franchise arrangement with the expectation that they will be able to make a profit. The franchisor might set revenue targets for you to achieve; or it may be that in bidding or applying for the franchise you may have had to put together your own projections.

In either case, you need to be aware of what those targets are, you should be satisfied that they are achievable, and you should be aware of what the consequence of not meeting them might be. 

Now go and franchise a business!

Does this all sound a bit daunting? Well, don’t be put off. there are thousands of successful franchises, and there’s plenty of guidance to help you. Good luck!

Get your free guidance on all the various ways you can run a business without lawyers at www.simplifythelaw.co.uk

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