Commercial Law

Have You Considered Franchising?

There comes a point where every business owner needs to consider what is the best way to grow their business. If you have built up a solid brand and a proven business model, you might want to consider franchising.

What is a franchise?

Think of some major companies.  McDonald's, Subway, and Jim’s Mowing are household names, and all are built on the franchise model.  Within a franchise, a business sells a licence to a third party (known as a franchisee), allowing them to use their name, branding, and business model in exchange for a financial return.  The franchisee owns the business but usually must operate under standards and policies set by the franchisor.

What are the advantages of creating a franchise?

Advantages of starting a franchise include:

  • you do not have to supply the capital to expand into new cities and/or countries
  • the managers of your new outlets will be motivated and committed because it is their own business
  • you can grow quickly, ensuring you stay ahead of your competitors
  • franchising provides a framework to refine processes and hone your brand
  • reduced risk

What are the disadvantages of franchising?

Disadvantages of being a franchisor include:

  • there will be a significant capital outlay required to have the legal documents drawn up, and model the processes and procedures of the business so they can be easily replicated by franchisees
  • you will have less control over your business and brand
  • your profit will be much less than if you owned all operations of the business yourself

How does the franchising agreement protect me?

The franchise agreement governs the relationship between the franchisor and the franchisee.  It is imperative that this is drawn up by an experienced solicitor.

The principal issues to be covered are by a franchise agreement are:

  • the rights being granted to the franchisee
  • is the franchise to be exclusive or not? Commercially this may be unobjectionable; however, exclusivity can only be granted in the EU subject to conditions 
  • the territory. Additional considerations (relating mainly to business practice and dispute resolution) apply where the franchise is in a different country to the franchisor
  • the term - five to ten years is typical, often longer in overseas arrangements. 
  • renewing the franchise agreement
  • what sales targets and franchise development schedule are appropriate
  • what trademarks and other IPRs are to be licensed
  • a clearly defined disputes resolution procedure
  • the party’s obligations, notably:
  1. the franchisor—provision of training and other support, regular monitoring and assistance to the franchisee, updating the manual, availability of key supplies, and
  2. the franchisee—hiring suitable personnel, the effort devoted to the franchise, compliance with the manual, keeping records and making payments

Franchising may be an excellent way for you to grow your business with limited risk.  You can find out more at the British Franchising Association.

To locate an experienced commercial solicitor in your area who can assist you with drafting a franchising agreement and all other legal advice relating to franchises, search Solicitors Guru today.

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