By Matthew Poli, Director at iLaw
Starting a business from scratch can be stressful, so it is easy to see the appeal of joining a franchise. Similarly, if you already own an existing brand and want to expand, but don’t necessarily want to take the risk on your own setting up a franchise can be an effective way of growing your business.
Of course, each of these scenarios brings with it some unique challenges that aren’t faced by those operating on their own.
To help franchisees and franchisors gain a greater appreciation of the challenges they face, we have put together a list of some of the common pitfalls that they face.
Entering a franchise can feel like stepping into the unknown, even when it is an established brand. The level of investment required can differ greatly from franchise to franchise, so it is important to find out the total start-up and franchise fee. You need to be clear on how much you are willing to put in and anticipated returns.
It may seem like franchisors are willing to just let anyone join as long as they have the required capital, but this is rarely the case. You are, after all, handing your brand over to someone who is unknown and it is easy for them to devalue or compromise your intellectual property. You should take time to find out about the person looking to take the franchise; whether they have previous business experience and whether they have been successful or not. If it doesn’t feel right then it is OK to reject their application, as long as it is on legitimate grounds.
Franchisors will often offer to introduce you to other franchisees. This will be a good opportunity to find out more about what is involved, but take everything with a pinch of salt. They are likely to only want to introduce those who have achieved success. Ask existing franchisees what the franchisor’s support is like and if the turnover/profit projections are realistic. If possible, try to speak to less successful franchisees to find out if it is an issue with them or the franchise itself that is holding them back.
It is strongly encouraged that you open up a clear dialogue early on with those interested in joining your franchise. This is an opportunity to learn more about them, their level of risk and their ability to continually invest in the franchises they hope to open. You need to ensure that you can work with them regularly; a clash of personalities may be an early sign that things may not work out.
Most franchisors offer training and support to ensure the business has the best chance of success, but this can vary in its intensity, and may be charged for. Make sure that you are being offered sufficient support and training by the franchisor to meet your needs and level of experience.
Training is an important element in protecting your brand and reputation. It is one area where you can ensure that the message of compliance is driven home, so ongoing support should be offered alongside a regular schedule of assessment. The most successful franchises, like of McDonalds and KFC, do this particularly well and have invested significantly in their support structures.
Be Aware of Fees and Costs
As well as an upfront fee, franchisors tend to charge a management service fee, which will usually be collected either as a percentage of monthly turnover or via the supply of the raw materials used to produce saleable products. They may also impose conditions on the sale of the franchise, for instance the requirement to pay a fee to obtain their consent to transfer the business.
Both parties need to clearly understand the structure and level of fees and agree on them. This should include a breakdown of what the franchisee will receive in return.
Many franchisees are surprised at the cost of getting their business off the ground and tend to fail to consider the cost of training and marketing, which are often part of the fee structure within franchises.
Franchises are often built around a strict set of guidelines and rules, which tend to be agreed upon via a franchise agreement. This will also include details of the fee structure that has been agreed and will often also mention expectations of the franchisee, such as not bringing the brand into disrepute.
These legally binding contracts can run for a term of five years or more. As such they can contain procedures for the early termination of the franchise relationship, similar to a break clause that will allow a franchisor to remove the right to operate under their brand.
Similarly, it may include a clause that allows a franchisee to sell their franchise or depart early, but this could result in a financial penalty.
The agreement may seek to make you personally liable (should you chose to enter into the franchise agreement through a limited company), not only for past-due royalties and advertising fees, but also any damages related to your franchise so you must have the agreement review carefully by a solicitor with experience in this area.
Franchise agreements are an essential part of franchising your business and will dictate how you can manage the franchisees within your group. It is, therefore, essential that they are robust and comprehensive.
Many franchisors have fallen foul of UK competition law by imposing conditions that prevent franchisees from being competitive this includes dictating the prices at which franchisees can sell their products or services or prohibiting them from selling online.
Many websites offer free templates for you to use, but these may not take into consideration the particular needs of your business, so it is best to seek independent legal advice if you are considering creating a franchise.
How iLaw can help
Whether you are looking to establish a franchise as an expansion of your own business or if you are looking to join an existing franchise as a franchisee, you must seek independent legal advice. We have helped with the creation of franchises in several sectors and can help with a variety of matters. Please contact us today to find out how we can support you.