All franchises have a number of things in common. The party taking up the franchise (franchisee) is granted by the party who owns the franchise (franchisor) a number of rights in exchange for payment. This payment normally includes some form of initial premium then a number of periodic payments.
How these payments are calculated will depend on the particular franchisor but they are often based on a minimum payment and then calculated in reference to turnover.
In exchange for this payment the franchisor (depending on the particular deal that you have negotiated) should grant the franchisee the right to use the name associated with the franchise and also the franchisor often provides training and assistance to ensure that the franchisee performs to the same standard as all other franchisees.
Before entering into a franchise you should ensure that you have a franchise agreement in place and that you have taken legal advice on the terms contained within this.
Even though many franchise agreements are submitted to franchisees on a “take it or leave it” basis, using the rationale that all agreements must be the same to ensure consistency, such agreements are often very detailed and contain points which may appear to be of little consequence but which could create major issues if you are unaware of the implications.
Even of most areas are non-negotiable, it is inadvisable to enter into these agreements without knowing all the implications risks, and costs.
The franchise agreement will often also include details on how much the franchisee should spend on marketing, products, advertising etc or will provide that the franchisor will undertake all of this but at the franchisees expense. The agreement may well restrict the franchisee also in many important respects which will need to be considered also.
Enquiries are also recommended of other franchisees to find out their experiences of operating the franchise and any pitfalls. Many franchisors will try and restrict who can be approached and to slant this process, which is another good reason for having the right advice.
Franchisees should also carefully consider the exit provisions and ability to sell on the franchise, together with costs such as property costs and the terms of any lease of premises associated with buying the franchise.
If you are running your own business and you believe that it would be successful offered to a wider customer base then you could consider setting up your own franchise. In order to do this you will need to produce a detailed business plan, your solicitor and accountant can assist with this. Whilst the business plan will generally follow a similar format to a business plan for a non franchised business other than it should include detailed sections setting out the reasons for franchising and an explanation as to why you believe the business would be a successful franchise, the fact that the product or service would appeal to potential franchisees and how the company is run and how this would work from a franchising point of view.
If you do decide to franchise your business it is important to have an operation manual in place.
This is generally a confidential document which is not supplied to the proposed franchisee until such time as they have entered into a confidentiality agreement or the franchise agreement itself. The operations manual sets out how the franchise is to be run, it often contains details on how a product is made or sold, training techniques, costing etc. The franchisor will not want the franchisee to se this document until such time as they have agreed terms or shown some form of commitment.
Franchisees, if they are new to business and need trading premises may not be in a position to secure a lease, as part of the franchise agreement a franchisor may agree to enter into a headlease with the landlord or owner of the premises and in turn to grant a sub-lease
• Due diligence and the role of the BFA
• Pre-contractual recruitment material and financials
• What does the contract mean
• Disputes, payment and franchisor’s obligations
• Termination, negotiating and drafting termination documentation
• What happens after termination – personal liability?
• What is the length of term of the Franchise Agreement and how can it be brought to an end by either party?
• What is the financial structure to the Franchise Agreement? What is the cost of entering into the Agreement and what are the financial benefits to the franchisee and how are they to be paid?
• What financial commitments and resources are to be applied by the franchisor and the franchisee during the agreement?
• What training and support is to be given by the franchisor?
• What area is the franchisee allowed to operate in?
• Will the franchisee have an exclusive right to operate in such an area?
• What is to happen to the franchisees business when the franchise comes to an end?
• Can the franchise be renewed?
Despite the fact that the Franchise is becoming a popular business model in the UK there is still not much in the way of regulation in place. There is a British Franchise Association and if you belong to this then you are obligated to comply with the European Code of Ethics for Franchising but it is essentially self regulated. There are however certain regulations relating to trading which both parties will need to comply with.
Getting out of a franchise may also involve complications where the franchise is not terminated but instead the franchisee wishes to sell his, her or it’s interest. The franchise agreement is likely to have strict criteria which must be fulfilled, including the any assignee (buyer) must be satisfactory, which will almost inevitably mean delay and additional legal costs.
From the franchisees point of view, it can be daunting if the arrangement is not working out. Franchisees are all too aware that they will be up against a much larger organisation with greater resources. Litigation should be avoided wherever possible, but this is not to say that it is impossible to negotiate on best available terms to exit a franchise. The franchisee may be able to argue that the franchisor is in breach of contract or there may have been a misrepresentation.
Other aspects which may arise on terminating a franchise agreement include exit payments, possibly for stock, other penalties under the franchise agreement, possible employment law issues and commercial property problems where the franchise is run from shop premises, where there is a lease and the franchisee may be the leaseholder and need to try and assign the lease or negotiate a surrender if possible.