Growing your business through a franchise operation

Does your business have what it takes to become a franchise operation?

Franchising

There is no legal definition of franchising but a franchise is a contractual relationship where the franchisor:

• allows a franchisee to use its trade name, marks, brands and business ‘system’
• exercises continuing control over a franchisee
• is obliged to provide training and assistance to a franchisee
• requires a franchisee to make an initial and continuing payments to the franchisor

Fast food chains such as Mcdonalds, Burger King, KFC and Dominos Pizza are well known examples of franchised businesses, however there are in fact over 935 business format franchise systems, around double of what there were 20 years ago.

If you have a successful business that is capable of replication elsewhere, franchising can be a very effective way of growing it. Instead of having to finance additional outlets from your own capital, it entails working together with independent franchisees who pay you for the opportunity and your support. Franchising, if done properly and ethically, can bring long-term financial reward for all parties.

It is not a quick fix to boost profits, however, nor a rescue strategy for a failing business. The franchising process takes considerable time, effort and money. It is therefore important to determine at the outset whether or not franchising is indeed the right format for your business expansion. You should bear in mind the following considerations:

Is your existing business successful?

No one will want to buy a franchise from a business that doesn’t make any money. The franchised business will need to be profitable enough to generate revenue for both you and for the franchisee.

You will need to be able to offer potential franchisees the opportunity to participate in a proven and sound business model and demonstrate to them that there is significant demand for your product or service.

Can your existing business be replicated?

With training and ongoing assistance, your franchisees should be able to operate your business model from different locations. You will need to create an operations manual containing all the practical detail they need to set up and run the franchise. Bear in mind that it may be difficult to franchise a business which involves very complex systems, processes or a high level of skill from individuals. To demonstrate that the business model works, you should ideally run a pilot operation, perhaps with an existing employee acting as your first franchisee.

What can you offer franchisees?

Franchisees will want a business system that is worth paying for as opposed to simply setting up on their own. They will look to you for a recognised brand name, a tried and tested business model and ongoing training and marketing support. Branding is all-important to franchising, so it is important for you to consider at an early stage protecting your brand – your intellectual property rights in particular.

This will almost certainly involve registering your business name as a trade mark.

Do you have the resources that franchising demands?

Do not underestimate the demands that franchising will place on you. If you have limited financial resources, for example, or are already working flat out running your business, you may not be ready or able to pursue the franchising route. Alternatively you could consider licensing someone else to manufacture and sell your product, using an agent to sell your product on your behalf, or selling your product to distributors who then sell it on to their own customers.

So what are the advantages and disadvantages to franchising your business?

Financial benefits

The financial benefits can be significant – after all, you expand by utilising the manpower and resources of others, and each franchisee finances the set up of their own business. You then typically receive an upfront, initial fee followed by ongoing royalty fees from the franchisee. Your potential exposure to risk is therefore reduced and you may be able to expand more quickly than might otherwise be the case.

Reduced management time

As the franchisee runs their business themselves (albeit with your support), the level of your required management time is lower than with a company-owned outlet. Good franchisees are likely to be more motivated and committed than employees, with a commitment to increasing the turnover of their franchised outlet and so making your life easier.

Collective power

There can be additional benefits as your franchise network grows. Your increased purchasing power for example, may allow you to negotiate substantial discounts from suppliers. Each franchisee may also contribute to a central advertising fund, allowing you to raise awareness of the brand as a whole, to everyone’s advantage.

Recession proof?

Franchising is considered to be one industry which actually seems to prosper during a recession.  Many prospective franchisees are choosing to get into franchising as they are disillusioned with the lack of secure employment currently on offer. With thousands of people throughout the UK being made redundant, many of those fortunate enough to receive redundancy payments or have capital available for investment are giving serious consideration to entering self-employment by purchasing a franchise.

In addition, the ‘tried and tested’ model of an established and successful franchise is a more appealing lending prospect to banks.

Also with more of us working from home all or part of the time recently, the 9 to 5 has really been turned on its head. From walking the dog to the school run and fewer wasted commute times, it’s led many prospective franchisees to question what they are doing careers wise – and where and when we’re doing it.

Potential disadvantages

Recruiting good franchisees and then managing them can be easier said than done. You will need to invest time, money and energy in this vital process, because a poor franchisee has the potential to damage your brand’s reputation and therefore your core business. You will need to control your franchisees, which is done through the terms of your franchise agreement – a comprehensive document which needs to cover what happens when things go wrong.

With less risk, comes potentially less reward. Company-owned outlets (even taking overheads into account) may be more profitable than franchised outlets. You may also feel a loss of ownership as you share your concept and product with your franchisees, who will be business owners in their own right.

Despite such potential drawbacks, franchising continues to be a very popular method of business expansion, especially during touch economic times. It can offer small business owners the opportunity to compete with the big players within their industry on a national and sometimes even international level.

In summary:

• Can you demonstrate that your business provides an attractive franchise opportunity?
• Be prepared to provide a comprehensive operations manual, training and marketing support
• Benefits include an upfront fee and ongoing royalty payments, reduced management time, better collective buying power and shared business risk
• You will need to protect your brand and business through the provisions of a legally binding
  franchise agreement and trade mark registration

Paris Smith LLP can assist franchisors in the following areas:

• Preparing the franchise agreements and supporting documentation such as confidentiality agreements, terms and conditions of business, and software licences
• Brand protection
• Ensuring franchise agreements conform to legislative changes and EU/UK competition law changes
• Franchise re-sales
• Franchise disputes
• Franchise property issues

We also offer a fixed fee franchise agreement review service for prospective franchisees.

Visit our Franchisor web page to see the services we offer to franchisors.