Ann-Maree Blake, Data Protection and Corporate Partner
Are You Ready To Franchise Your Business?
So, business is booming. You have a fantastic team in place. You’re on track to meet your short-, medium-, and long-term commercial objectives. What’s next? If you have an established brand, are passionate about training and mentoring people, and have developed finely-tuned processes and procedures in your current operation, franchising can provide enormous financial and personal achievement.
To find out what franchising is and the legal matters you must consider when setting up a franchise, read on.
What is a franchise?
McDonald’s, Subway, Tappy Toes, Lobster Lettings – many franchise businesses are instantly recognisable. At its most basic, a franchise is where a business owner (the franchisor) sells a licence to a third party (the franchisee), allowing them to use the franchisor’s brand name, products, services, processes, and training methods. In return, the franchisor provides the franchisee with support in training, marketing, and running the business.
It is vital to note that you should not franchise your business until you can show you have a proven and successful format that can be transposed to other operational units.
The advantages of franchising your business include:
- You can expand without having to use your own capital. Finding the funds/investment to move into additional national and/or international markets is one of the biggest barriers to growth. Franchising your business means the franchisee takes on the debt and because they sign the commercial lease, contracts, etc associated with the new operation, the risks of expansion.
- The manager of the new operation will be highly motivated. The old adage “you never work harder than when you work for yourself” is true (as you will know). A franchisee is not simply a unit manager, they are a business owner, and many have invested their life savings into buying your franchise. Hence, they will be as driven as you are to make the franchise operation succeed.
- Being removed from the day-to-day- running of the franchised entity allows you to focus on big-picture strategy and growth.
- When it comes time to sell your business, having a successful franchise operation with a proven track record of scalability and profit will increase your organisation’s value.
Should I start with a pilot operation?
There has been a recent trend for businesses in certain sectors, especially STEM, to launch a franchise without first committing to one to two years of trialling a pilot operation. The reason for this is fear that competitors will swoop in and copy some or all aspects of new innovative products or services. However, neglecting the pilot stage is a mistake as not only will a pilot operation help you understand whether a franchise model will succeed, it will also provide the time and opportunity to refine your processes and procedures.
If you skip running a pilot, you cannot be said to be providing a proven successful format, instead, you are merely using the franchisee’s experience and capital to expand your business.
What are the legal considerations when franchising my business?
There are several legal considerations to franchising your business, including:
- The Operations Manual – this alongside the franchise contract provides the regulatory framework for how every unit of the franchise will operate. The Operations Manual will set out the day-to-day working instructions to the franchisee, including what equipment to use, marketing and advertising, financial reporting requirements, and all the standard forms to be used for contracts, supply ordering, etc.
- The Franchise Agreement – a legally binding agreement that sets out the terms and conditions of the relationship between the franchisor and franchisee.
- Pre-contract disclosure – the British Franchising Association’s (BFA) Code of Ethics requires that members disclose certain information before entering into a franchise agreement. However, there is no legal requirement to make pre-contract disclosures to franchisees. You can also insert exclusion of liability clauses into the franchise agreement to protect you from potential liability for perceived misrepresentations. However, the law relating to pre-contract disclosure is far tighter in many other jurisdictions; therefore, invest in robust legal advice before opening any branches abroad.
- Head lease of premises – because franchisees often have no track record of leasing a commercial property or even running a business, a landlord may insist that you take on a head lease of a property and grant a sub-lease to the franchisee.
- Intellectual property rights – One of the most important elements of a franchise is the franchisor’s trademark. The attraction for a franchisee is being able to mitigate the risks associated with working for themselves by running their business under an established and trusted brand. An experienced Commercial Solicitor can assist you with applying for a trademark and any other intellectual property rights you will need such as design rights and patents.
Deciding to franchise your business can be incredibly exciting, madly challenging, and extraordinarily rewarding. If you think that you are ready to explore the possibility of franchising, please feel free to contact me in complete confidence.
Want to know more about franchising? Please contact our commercial partner, Ann-Maree Blake on +44 (0)20 7908 2525 to make an appointment.
Please note – this article does not constitute legal advice.