Your Franchise – what you need to consider

Specialist Franchise Solicitors –  our top tips

Franchising is becoming an increasingly popular way for people to run their business. Essentially it involves one party (the ‘franchisor’) granting a licence to another party (the ‘franchisee’) allowing them to trade under the name of the franchise in question as if it were a branch belonging to it.

The franchisee runs the day-to-day business, whilst the franchisor deals with marketing and quality control. In return for running the business the franchisee pays over a regular fee to the franchisor.

The following are few things that our franchising lawyers suggest you should consider when licensing out your franchise:

Company Formation

Usually, a franchise will trade as a limited company registered with Companies House. This, as with most businesses, is so that its legal liabilities are separate from the owner’s personal liabilities.

Territory

Allocating a geographical area to a franchise is a fine balancing act. You need to allow enough scope so that the franchisee is not concerned about heavy competition, but you also need to make sure that an area is sufficiently exploited for maximum profit. Think about how far the franchise could expand in one particular geographical area and divide this area up accordingly before offering out the franchise.

Length of Term

A franchise agreement is usually made for a short period, namely 3–5 years, with terms for renewal drafted in. Therefore a franchisee is still attracted to the deal, but a franchisor can re-license to another party if the franchisee does not perform well enough.

Payment

Setting an initial fee for your franchise is difficult. You need to take into account:

  • Building costs, rent etc
  • Equipment
  • Hardware/software
  • Training costs
  • Transportation
  • Professional fees (one off and ongoing, such as solicitors and accountant fees)
  • Marketing costs
  • Contractor fees
  • Increase in wholesale costs

At the beginning make your fee competitive so that you attract the maximum amount of potential franchisees. When the franchise is then licensed out you must think about how much the franchisee will be responsible for and at what rate to set your on-going fee (known as a ‘Royalty fee’).

Another important thing to think about is setting targets within the franchise agreement. Profit targets are motivational for franchisees and can be even more successful when accompanied by bonuses for reaching them and sanctions for non-compliance. One sanction could be that the franchisee requires more training. If so, you must decide how this is to be delivered and who will cover the costs. The targets should be reviewed periodically.

Accounting

The royalty payment made to a franchisor is often based on the franchise’s turnover. Therefore as a franchisor it is extremely important that you monitor the franchise’s regularly. Negotiate with them to use a mutually approved accountant and get copies of the accountant’s reports at least bi-monthly but more frequently if possible.

Training

A franchisor must either provide training for their franchisee or recommend where they can go for it. When choosing a franchisee you might want to make sure that they have been on a training course if they have no previous franchise experience.

The most successful franchises will have a set training structure that ensures that the franchisee knows exactly how to make the most money out of their franchise.

Operation Manual

The operation manual is an ever evolving guidebook on the inside knowledge of the franchise and should dictate how to run it effectively. It will contain the franchise’s trade secrets and show the franchisee how to exploit these without breaching any copyright. The manual should be created by the franchisor and developed over time by information provided by the franchisee.

Property

Depending on the type of building required for the franchise, the usual set up is for the franchisor to lease the property and then sub-lease it to the franchisee. Sometimes, however the franchisee can directly take out the lease, although this takes away some of the control from the franchisor.

Getting advice about the best way to handle the property issue is very important, particularly if you are thinking of sub-leasing as you must make sure that the head lease legally allows you to do so.

Equipment

When selling a franchise you need to estimate exactly what type and how much equipment is needed. This can range from large machinery down to staff uniforms. Decide what you will be providing in return for the initial fee and what the franchisee will need to purchase. For marketing materials it might be a good idea to lease them out to the franchisee so that you can re-claim them and use them for other franchises.

Advertising

This is important to a franchisor because, firstly, effective advertising will ensure that you reach the best potential franchisees to take on your franchise. Secondly, advertising will make sure that your product is sold through your franchises. You must work with your franchisee to make sure that your advertising is lucrative.

Intellectual Property Rights

A franchise package contains a variety of intellectual property rights (‘IP rights’), such as trade marks, brand names, designs, copyrights and patents all of which must be exploited by the franchisor. In order for IP rights to be successfully exploited they (in most cases) must be registered. Once a right is registered it is protected from infringement and can be licensed out to the franchisee.

One of the most important functions of a franchise is that it trades under the same brand or trade name as your business. People are buying into the name that you have created and it is this goodwill that encourages buyers to the franchise. These brands and trade names do not have the same value if they are unregistered. Take legal advice about registering your trade marks – an Intellectual Property solicitor will search the trade mark register and make sure that no other businesses are currently trading under the same mark as you.

You also need to be sure that you have protected the domain names for any websites – you will want a similar website name for the franchise as the main business.

How to choose your franchise

What industry are you interested in?
 Look at your current skill set and decide where you would be most suited to working. Whether it is retail, food & drink or IT services, you will need a strong interest in the area and basic skills to match.
Is there market demand for this type of franchise?This is particularly important if you are creating a new franchise, as you and any franchisor will need in-depth market research before starting to build the new franchise. If you are buying an established franchise, look at financial trends and carefully examine recent accounts and other financial information to assess its future potential. Having a good general commercial knowledge of the relevant industry is vital.

The reputation of the franchisor
It is extremely important to know how successful the franchisor is, not only as the owner of the parent company, but also when looking at their other franchises. Doing research into the parent company and any other franchises they run will give you an idea how profitable they can be. You should also be able to discover the level of support and control the franchisor has over their franchisees. Is there a good standard of training? How controlling are they on a day-to-day basis?

Your Financing
How much capital do you have access to and how much are you willing to spend? Shop around for a franchise opportunity within your budget, but be aware that balancing this with the right location can be tricky. Obviously the bigger the brand name, the more expensive the franchise will be. Ensure that you have enough capital to safely see you through at least the initial fee and 12 months of running the franchise.

Costs
Ask the franchisor for full details of all the costs incurred in running the franchise. You don’t want to be taken by surprise at a later date. Ask for ongoing costs, sales figures, profit and loss reports etc. If you are not clued up on reports and figures then find an accountant, preferably one with good experience of franchise work, to help you. Recent statistics suggest that the average cost of starting a franchise is £46,7000.

What do you get for your money?
What is included in the franchise fee can vary greatly between franchises, so find out what the franchisor pays for and what you must pay for, eg uniforms, training, marketing and equipment. The franchise agreement itself is absolutely critical to the success of your franchise – make sure you get the right legal advice from specialist franchising lawyers.

What are your long-term plans?
Some franchise arrangements can last up to 10 years or longer. If you do not want to be tied down for this long, then look for franchisors offering shorter licences, perhaps three years or less. Bear in mind however, unless you are buying an established franchise, you will need to spend time and money building it up – and a short franchise term could mean all your investment simply builds a profitable business for the franchisor to sell on at an increased price It is important to know what you want from your future before signing a franchise agreement, as well as being aware that you don’t want to be stuck doing something you hate for a long time. Specialist Franchising Lawyers will be able to advise you upon what type of agreement would best suit your long-term needs.

Renewing Your Franchise Agreement

After the term in your agreement with a franchisor runs out, you must renew it as soon as possible to continue your existing relationship. There are some common issues which can crop up when a franchisee wants to extend their Franchise Agreement, including the following;

• The vast majority of Franchise Agreements initially run for a period of five years, but some run for up to ten. A Franchise Agreement that has been effectively drafted will include rights for renewal of the franchise and should state under which conditions a renewal will occur, and the time period in which the renewed franchise will be valid in, usually at least one subsequent five year term.

As franchise renewals are usually mutually beneficial, there is rarely a limit placed on how many renewals are granted, particularly when most franchisors make their money from annual profit margins of the franchisee.

• In the last few years there has been a notable increase in the amount of renewal fees on Franchising Agreements, particularly by franchisors with very reputable brands. However, these fees are often small – but you should check to see if renewing your agreement will incur additional fees.

• Franchisees need to pay special attention to the conditions outlined in their Franchise Agreements – as a breach may lead to the forfeiture of any opportunity to renew the franchise.

Franchisees should also aim to renew well in advance of the existing agreement running out.

Have a look at your franchise agreement – often franchisees are expected to pay the admin and legal costs of the franchisor incurred in renewing the agreement.

• It is worth considering budgeting throughout the initial term of your Franchise Agreement for any additional costs if the franchisor incurred on renewal – including any request for you to refurbish, replace equipment or further train your staff before the renewal goes through.

• Some of your obligations in the previous agreement may no longer be relevant after renewal of your Franchise Agreement.

Also you need to look out for changes in the renewed agreement. Usually, a 2nd franchise term will be almost identical to the original agreement – but not always.
You should pay special attention to any changes in commercial terms, particularly as some franchisors look to change these when they are planning on selling their franchise business.

Running Your Franchise – 5 Mistakes To Avoid

Some money saving methods used by franchisors or franchisees can end up causing disputes and costing them far more than they saved. The following mistakes are 5 of the worst.

1. Not taking legal advice

This is the biggest error. Most franchisors will need legal advice regarding any agreements, documents and disclaimers that are produced. Getting the appropriate legal advice will prevent many problems that can arise and is the best way of preventing a possible dispute.

2. The use of template documents

Templates can seem like a low cost solution for documents such as Franchise Agreements, but in reality can cause you many problems. Most templates will not address the specific needs of your business. A worst case scenario is that the lack of clarity in a template document means that the other party finds faults and errors in it; and no longer feels they need to follow its terms and conditions.

3. Not ensuring Franchisees follow agreements

Any sensible franchisors will pay close attention to the conditions in the Franchise Agreement and make sure that every franchisee complies- or risks undermining the power of their brand. Any franchise or who finds one other franchisees in breach of one of the terms, must make sure they get the right legal advice on how to remedy that ASAP.

4. Not protecting intellectual property and trade names

Intellectual property such as branding is a huge asset for any business, particularly for franchises – in fact franchising could be described as a lease of your intellectual property.

Every franchisor must ensure the brand is protected as much as possible – using trademarks, copyright, patent or design rights – as appropriate.

Not keeping up to date with your protection of your trademarks, or other intellectual property rights could ruin your current brand and consequently have a negative impact on your business; not to mention the expense involved in rebranding.

5. Not securing your business property properly

If the franchisee is going to lease from the franchisor the property from where they intend to run the franchise business, the franchisor must make sure that they have the right lease in place.

Pilot Franchises

Before you begin franchising try a pilot franchise to test its viability in the current market. Running a pilot franchise is done as an outlet of your business, it is not done by a 3rd party. However from all intensive purposes it should look, feel and be run as a franchise would be.

The benefit of running a pilot operation is that you are able to see:

  • How well the franchise is received in the market
  • How well it succeeds in the location
  • How much equipment is needed to run it independently
  • What operating methods are the most successful
  • What marketing and financing is needed

Once you have run the pilot operation successfully for a reasonable amount of time you will be in a better position to judge both if the franchise is going to be a success and what terms to grant the licence upon.

Thinking of Franchising – contact the Franchise Solicitor today

Our Franchising Solicitors deal with franchising issues throughout the UK.

For specialist Franchising Disputes advice you can rely on, contact our Franchise Solicitors:

  • phone us for FREE initial advice on FREEPHONE 0800 1404544 OR
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