Franchising is a business form which has become more and more popular throughout the economy.
All types of companies can benefit from franchising, whether it involves small businesses becoming a franchise and selling a large corporation’s product, or bigger businesses expanding their own businesses by opening a network of franchises.
In this article, experienced Corporate & Commercial Solicitor Paul Longland looks at franchises in more detail; outlining the pros, cons and giving his advice.
What is franchising in business?
Franchising, in business, is where a company (franchisor) allows another party (franchisee) to use their know-how and brand name and sell their products.
The third party will either pay a one-time or monthly/annual fee to the franchisor in return for using the brand.
McDonalds is probably the most well-known example of a franchise. This company allows many third parties to use their brand name and sell their products around the World. They also operate their own outlets in parallel.
Is franchising your business a good idea?
Franchising represents an important part of the economy, and allows a person or company to own and run its own business under the umbrella and security of a well-known brand or trademark.
What types of business can be franchised?
All sorts of businesses can be franchised if they involve the supply of goods or services, but especially if their market is the consumer or small business market.
You might be surprised at some of the famous names, and variety of different businesses, that use franchising; for example Skechers, Costa Coffee and Pandora all use franchising.
Why should I turn my business into a franchise?
The franchise gives a new business starter the security of trading under a well-known brand, with an assured source of supplies and the benefit of the many years of experience that the franchisor has put into developing the business.
What are the advantages of franchising your business?
Below, we’ve listed some of the biggest advantages of franchising your business.
Your own Business
The person operating a franchise will be subject to the requirements of the franchisor in running the business but will form an independent business.
This means that they’ll be able to make decisions about the running of the business, recruitment, and the future direction of the business.
Profitability
Franchises can be very profitable. For example, the typical annual sales for McDonalds’ franchises are between £1.5m and £4.3m; with typical cash flow ranging anywhere between £50k and £550k after the first year.
(Figures can be found here)
Low-risk
In addition, running a franchise is a lot less risky than running your own start-up business.
This is because you’ll likely be running a popular business which has proven to be successful in the past and already has a well-oiled business model in place.
To refer to our example again, you’re more likely to have success operating as a McDonalds branch than you are running as your own start-up fast food business.
Support
Franchisors often have major support systems in place, both financial and non-financial, which can prove beneficial.
For example, a franchisor will:
- Sometimes provide a start-up fund
- Have all of the systems needed to run a successful business in place
- Normally provide the staff and management with training, so you don’t necessarily need the best business experience
- Be on hand to give technical and financial advice when needed
Additional benefits
Some additional advantages to operating as a franchise are as follows:
- Instant brand recognition
- Not having to start a business from the ground up
- Franchisors can sometimes provide better access to financing
- Franchisors will help to promote your business
- Big businesses have bigger buying power
- Access to the franchisor’s supply chain
What are the risks with franchising my business?
For the person taking out a franchise, the franchise fee can be very high and is normally payable up front.
Also, they’ll need to check the franchisor’s track record very carefully by speaking to other operators if possible.
Like any business, the operator of the franchise will also have the normal trading risks, employment obligations and may need to register for VAT.
Some franchises also may not be able to sell the business without permission from the franchisor.
What are the risks for the franchisor?
For the person granting a franchise, the key element is to select capable franchisees who will be prepared to enhance the goodwill of the brand by operating in a professional way.
Training may be needed. Also, for retail type businesses, the location can be critical.
How does a franchise get paid?
The franchisee is normally responsible for all outgoings, and keeping the proceeds from the business, but part of the turnover is normally payable to the franchisor as a franchise fee.
There may also be sums payable by way of contribution to central advertising and publicity.
How do I become a franchisee?
Most big corporations allow you to apply online to become a franchisee.
Applying obviously doesn’t guarantee that your business will be picked to become a franchise, as there are many factors involved such as their view of your suitability, running costs, location and the makeup of your current business.
How do I franchise my business?
As a potential franchisor, you need to work out what the unique and strong elements of your business model are and assess whether that business model can be replicated in branches operated by a network of franchise operators.
Intellectual property, such as trademarks, logos, know-how, software, designs copyrights and recipes may be critical to the business and should be protected by registration where possible.
Read more about protecting intellectual property in our dedicated article here.
Some careful financial modelling is needed to assess the viability of each franchise and set the right level of fees payable to the head franchisor.
The British Franchise Association have a lot of information available for those thinking of going into a franchise and their website is worth visiting here.
Advice for potential franchisees and franchisors
At Frettens, our specialist Corporate & Commercial Team can assist you in a multitude of ways.
For potential franchisors
- Protecting your company’s intellectual property
- Drafting:
- Confidential agreements
- Deposit agreements
- Franchise agreements
For potential franchisees
- Assistance with, understanding and signing of:
- Confidential agreements
- Deposit agreements
- Franchise agreements
If you would like legal advice, or have any questions following this article, please don’t hesitate to get in touch with our bright & experienced team.
Call us on 01202 499255 or fill in the form at the top of this page for a free initial chat.
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