16th February 2017
Expanding your business by opening new branches is a costly exercise. Each expansion will involve staffing and property costs as well as marketing and equipment expenditure. Franchising your business can prove a less expensive option but, as with most new business ventures, is not an automatic route to success.
In 2015, the results from the BFA/NatWest Franchise Survey showed the franchise industry’s annual turnover to be over £15.1bn, with nearly 1000 franchisor brands operating in the UK market alone, employing over 620,000 people. If you are considering franchising your business, then we set out some key points to take into account to help you understand the process and be aware of the potential pitfalls.
Is your business ready?
A track record is an essential element of a franchise offering. The business will need at least two years trading history (often more) in order to attract franchisees and profitability. The business needs a service or other model that can be replicated. You should take time to evaluate the other alternatives to grow your business, such as acquisitions or organic growth.
Protecting your brand
Arguably a franchisor’s most important element is its brand, particularly its business name and trade marks. It will therefore be important to protect your intellectual property (IP), your business ideas and concepts as best as possible. Any unique logos, names, shapes, colours etc should be registered as trade marks, and you should also ensure that your concepts and ideas are set down in writing and marked confidential with the company/business name, the date and the copyright symbol. The franchise agreement will also contain robust provisions to protect your brand and IP. Before disclosing your concepts, ideas and methodologies you should ask potential franchisees to sign a confidentiality agreement (also known as an NDA – non disclosure agreement).
Franchising Operations Manual
The main appeal for franchisees will be your business’s proven capacity for success and you must be able to demonstrate to a franchisee how to achieve this. Such sharing of “know-how” is done through an Operations Manual which sets out the day to day operational instructions for the franchisee and is an essential part of the franchise business and operation. The manual may be altered from time to time, giving you flexibility to respond to changes in market conditions. It should include information on the operating methods of the franchise (such as equipment and stock requirements) and the specific operation instructions (for example, standard procedures and necessary forms, staff uniforms and staff training). The franchisee will be obliged to run their franchise in compliance with this manual.
The Franchise Agreement
The franchise agreement is a key document which sets out the rights and liabilities of both parties. We summarise some of the financial considerations below, but the agreement will cover every aspect of the relationship. This agreement should govern arrangements from the outset through to the termination provisions covering the parties’ respective rights and restrictions after the relationship has ended.
Initial Fee – this is paid by the franchisee at the commencement of the franchise agreement, and is intended to cover the franchisor’s “set-up costs” (for example, the franchisee’s training). In terms of the specific initial fee, it is sensible to carry out research of similar franchises to find out what is normally paid in your specific sector. There may be a deposit which should be deducted from the Initial Fee. The franchisor’s reasonable legal fees are often payable by the franchisee.
Continuing Fee – you will want to consider how this amount should be calculated for each year of the franchise agreement. It can either be linked to a percentage of the annual turnover, the operating profit, or be a fixed price. You should also consider the mechanism for payment, the frequency of any payments (for example on a monthly, quarterly or annual basis) and any tax implications (which will require input from your accountant).
You should take into account the territory in which the franchisee is to operate their business. This should be specifically set out in the franchise agreement, using a map if appropriate. Important points to consider here are whether the territory will be exclusive to the franchisee, whether you wish to reserve the option to also operate in the franchisee’s territory, or whether you would like to enter into a licence to allow another franchisee to operate in the same territory. Restrictive covenants in the franchise agreement may also be linked to the given territory.
This is one of the most time consuming and hardest aspects of the franchise model. As well as advertising and trade exhibitions, there are franchise recruitment consultants and recruitment websites. The key to success is to think long-term and select the right candidates based on the quality of the applicant’s specific attributes. Much of the initial research of potential franchisees will be web based. Your website should be up to date and contain specific franchising pages and set out the process for new franchisee applications.
Test the Franchise
By this stage, you should have a business plan outlining the franchise proposal and have your IP protected adequately. The Operations Manual will be ready along with the legal contract. You can pilot or test the franchise scheme by offering a franchise for a limited period of say, 1-2 years and ideally in more than one location. The pilot allows for any potential problems to be identified before the network is rolled out and the recruitment stage has commenced.
Your Legal Advisors
At Mundays we have a vast amount of experience assisting with the set-up of franchises. We will take steps to fully understand your business in order to put in place the somewhat daunting documents that are standard in the industry. Neale Andrews and Fiona Moss head up the Franchise Team at Mundays, the team covers property, employment, dispute and commercial. If you are interested in franchising your business then please get in touch on 01932 590500 or email firstname.lastname@example.org.
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Within this edition of Mundays Business update you will find legal articles that we hope you will find useful and help you understand when you might need to seek legal advice.
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