For many business owners, taking an established brand and overseeing its expansion across a network of franchises in a new region seems like an effective route to growth and success. But of course, franchising isn’t without its challenges – and includes a number of legal issues that need to be carefully considered.
The key to success is thoughtful planning right from the very beginning. Perhaps the most important thing to consider before entering into any agreements is whether the business is suited to being franchised in the area you are considering. To create a successful franchise, you need to get other people interested in becoming franchisees and buying into the brand. Interest will be based on how well the business is doing as it currently stands and whether is it something that can be successfully replicated. It needs to display a strong history of profitability and it needs to offer something to consumers in different areas – not just the location that the business is currently situated. Carrying out market research will be beneficial in investigating whether there is a demand for your services in different areas and if there is room for the brand in a new marketplace.
Further to this, it’s important to look at your own capabilities as a business owner and a potential franchisor. You need to be prepared to enter into a period of change, as your role will now see you supporting a number of franchisees rather than just running your own single business. As a master franchisor, you will have to give up some of the control as to how the business operates. Franchisees won’t do everything the way you would have done it and this is something that you need to be comfortable with.
To gather interest from potential franchisees, you need to show that the business model works and is sustainable. The best way to prove the success of the model would be to set up a couple of pilot franchises. This allows a franchisee to open up a franchise – for a reduced fee or with lower targets – and then test out the processes and techniques so that any difficulties or issues can be dealt with before wider rollout of the franchise takes place. Pilot franchises help to refine the processes and if successful, demonstrate first-hand that the plan is viable.
During this stage, it’s also a good time to decide how you’re going to operate as a master franchisor. You need to think about the fees that you will charge and how the franchisee will pay these fees. How long will the agreement last and in which area will you allow individual franchisees to trade? There are a number of things that you need to carefully consider and these should all be agreed and documented in the franchise agreement.
The franchise agreement is the most important legal document that you will need to have in place, as it will formalise the relationship between you and the franchisee; just like the agreement you have with the brand owner as a master franchisor. This document is often extremely long as it will cover every aspect of the agreement including its duration, the fees and costs that will be paid, the territory that the franchisee can trade in, and transferring the business if the franchisee wants to exit. Everything agreed between you and the franchisee must be included in the document and it’s important to ensure that everything within the document is acceptable to potential franchisees.
It is highly advisable to seek expert advice from an experienced franchise consultant or solicitor to ensure that the documentation is legally sound and watertight in case there are any disagreements at a later stage. Having the correct document in place, and ensuring that it covers all the necessary requirements is vital to make sure that you are legally protected.
Franchisees will be trading under the brand name you represent – a name that will have gained its good reputation and trust over a number of years and through the hard work of many individuals. Brand reputation is the most valuable asset to any business. So regardless of which franchise unit a customer visits, they should receive the same high standard and quality of experience.
As business owners will know from running their own company, reputations can take a lifetime to build up but can be destroyed in an instant. For this reason, franchisors need to take the appropriate measures to ensure that a franchisee will not damage the brand or bring the company name into disrepute – especially when the franchisor has limited control over the day-to-day management. The trademark and brand name of the business both need to be correctly registered to ensure that the business’ name is protected from misuse. If a franchisor brings the company name into disrepute, then you have the right to terminate the contract and this should be stated in the franchise agreement.
When creating your business plan, it’s important to consider all aspects of the process – and this includes what will happen further down the line. Putting together a five-year plan will help you determine what you want to achieve and will help you be prepared and able to deal with things that may arise at a later date. You will also need to consider your course of action if the franchisee wants to exit the business or is unable to carry on running it – will you buy the franchise back, for example? Having a strong plan in place now will ensure that you are ready to deal with any issues or unexpected situations that may come up, and this will aid the success of your business venture.
Stephen Attree is a managing partner at MLP Law (www.mlplaw.co.uk), one of the leading commercial law firms in the North West. Headquartered in Altrincham with additional offices in MediaCityUK and Liverpool, the company is ideally placed for ease of access serving local, national and global clients from start-ups to large corporates.
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