Introduction
Net Lawman provide a number of articles on franchising – read this one first. The other articles address specific aspects of franchising such as ‘which type of franchise will suit you best’ and the ‘legal issues’. Links to these articles are at the end of this one.
This article will be useful reading for anyone thinking about buying a franchise as well as business owners who want to franchise their business. Whichever side you represent, you can gain the upper hand in the franchise negotiation deal by supplying the legal document. There is little statutory intervention in this area which means that your franchise agreement is really very negotiable. Use a Net Lawman template franchise agreement to ensure you get it right, or simply use our template agreements as a starting point for negotiation. Of course if you are the franchisee, and the franchisor already has a number of franchises up and running, there is less room for negotiation due to the requirement that the agreements should contain the same terms.
Franchising used to be concentrated in a limited number of markets, predominantly fast food, motor distribution and hotels. Now however, at least twenty business sectors are represented from insurance services, hairdressing to quick print and design, and video rental to roof thatching. Of course each business has its own benefits and its own pitfalls.
What is franchising?
The wider term 'franchising' is used to describe many different forms of business relationships, such as licensing, distributing and agency arrangements. However, in this context, by ‘franchising’ we mean 'business format franchising.'
'Business format franchising’ is the granting of a license by one person (the franchisor) to another (the franchisee). The license allows the franchisee to trade under the trade name of the franchisor. The license also allows the franchisee to benefit from a whole variety of support services, which will allow him (an otherwise untrained person in the business) to manage and run the chosen business successfully.
Franchising is a method for growth by granting a license to others to sell their product or service. The benefits are easy to see, although there are disadvantages for both parties, which we discuss later.
Advantages include:
- As a franchisee, you don't have to come up with a new idea – plus it has been tried and tested;
- Larger, well-established franchise operations have proven marketing campaigns and a brand name that helps to ensure your product is sold locally with minimum effort;
- You are most likely to receive training for yourself and your initial employees;
- Good franchisors can help secure funding for your investment for example, discounted bulk-buy supplies for outlets when you are in operation;
- Your customers understand that your brand is a quality product, a known quantity and value for money. They will trust you from the start because although you ‘own’ the business, you are part of something much bigger.
Who owns the business?
Each outlet is owned and operated by a franchisee so the franchisee runs and manages day to day activities. The franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business. So the flip side of having a known quantity, quality branded product is that you will often have to answer to the franchisor. For example, you may have to buy their secondary products, in which to make your own end product, or you may have to use their advertising styles and charts, or stick to a prescribed colour theme associated with the product.
Costs
The franchisor will receive a start fee from the franchisee in addition to on-going management service fee. This on-going fee is often based on a percentage of annual turnover or mark-ups on supplies. Of course the service fee ensures that the franchisee is supported by the franchisor predominantly by providing training, product development, advertising, promotional activities and management services.
The role of the British Franchising Association (BFA)
The BFA are an independent, non-biased organisation. Their main aim is to help potential franchisees recognise the ad and disadvantages to franchising and enable franchisee to make all aspects work to their benefit. They also help franchising businesses to secure their own position amongst the "good" operators.
Benefits of franchising
Owning a franchise is not a sure thing. It can be difficult; however, it is usually easier than starting with nothing but an idea. To be a successful franchisee, you must be able to stick to someone else’s system without requiring change.
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