One of the biggest problems most entrepreneurs face is how to grow their business. This is especially true where expansion requires extra people capable of doing a similar role across an expanding geographical area.
For many start-ups and growing small businesses, franchising represents the quickest and least capital-intensive way to scale up a business. Franchising also allows entrepreneurs to focus on what they are good at, seeking opportunities, innovating and developing better ways of doing things while letting other people run the existing business.
Key to the success of the franchise model however, is that franchisees have an extra level of commitment, as they will have to pay for the opportunity.
In the UK franchising employs around 600,000 people and generates circa £16 billion in revenue. It is also one of the key business models for certain business sectors.
Franchising also allows for faster domestic and international expansion. In the UK the top four franchises are US businesses: McDonald’s, Domino’s, Starbucks and Pizza Hut. There are also some very successful UK companies in the list of top franchises including: Expense Reduction Analysts, a business consultancy, InXpress a courier service, TaxAssist Accountants and Costa Coffee.
Buying a franchise is also often a better financial option for anyone looking to start their own business as one of the biggest and most expensive challenges, that of name awareness is normally covered by the pre-existing work of the franchisor and fellow franchisees. This is one of the reasons that business failures with franchisees is less than 3%. And why over 90% are profitable.
Issues to consider before adopting a franchise business structure
While the commercial benefits of franchising are obvious, there are, also issues that anyone looking to develop their business by franchising should consider.
Franchises work by virtue of a recognised brand delivering consistent service across all members. Therefore, the primary consideration any entrepreneur should consider when thinking about adopting a franchise model is ensuring your future franchisees have the same high and consistent standards that you do with respect to the business.
A robust Franchise Agreement is essential
A franchise agreement is a contract between a franchisor and franchisee that specifies certain conditions of running a franchise, both from the Franchisor’s and franchisee’s perspective.
In the UK the British Franchise Association supports both franchisors and franchisees and has a clear code of conduct for both.
The code includes, the rights and obligations granted to the franchisor and franchisee, the goods and/or services to be provided to the individual franchisee, the financial arrangements and duration of the agreement and the terms on which a franchisee can exit the arrangement or sell the business on.
Legal considerations for franchisors
Basic good practice for growing businesses
Before looking at the specifics for franchising it is worth checking that your current business has considered some of the most common legal issues.
Most start-up businesses are with family or friends and it is therefore easy to assume that nothing can go wrong in the future. But sadly, the future is unpredictable and events beyond your control happen and a shareholder’s agreement can dictate how these events are handled.
A good example is what would happen if your colleague and lifelong friend had an accident or divorce – could his partner sell the shares, or even change the structure of the business?
For all businesses protecting your Intellectual Property (IP) is important, but for franchisors it is paramount as it is what the franchisee is buying.
The UK government has some very useful information on Intellectual Property and how to protect it https://www.gov.uk/intellectual-property-an-overview. They summarise is very well – having the right type of intellectual property protection helps you to stop people stealing or copying: the names of your products or brands, your inventions, the design or look of your products and things you write, make or produce.
While there are off the shelf franchise agreements available, my advice would always be to consult a solicitor that specialises in this area of law and is a member of the British Franchise Association. The reason being that franchising, like any other business structure does occasionally run into problems. Having given specific legal consideration to your business rather than generic businesses can help prevent problems occurring and enable a faster and cheaper resolution.
- At a minimum your franchisor agreement would cover the following, but plainly it would also address the specific needs of your business.
- The obligations and rights of the franchisor and franchisee
- The goods and/or services to be provided to the individual franchisee
- How your Intellectual Property can be used – including the likes of bespoke software, logo, trademarks etc.
- What rights a franchisee must change or evolve your IP over time and given changing circumstances
- The financials of the franchisor / franchisee relationship
- The length of the agreement and terms for termination, renewal or transfer to another party
Final thoughts for entrepreneurs
Franchising is too often overlooked as an expansion option by entrepreneurs and their advisers. Plainly it’s not an option for all businesses, but in my experience the business model deserves greater consideration than it often receives. Key to the franchising model’s success is that the model is based on not only the entrepreneur that founded the business but also the tens, or even tens of thousands, in the case of McDonalds of entrepreneurs that share the ambition and have invested their own money into its success.