How do you know when it’s right to franchise your business?
Simply put, franchising is a business model that looks to expand a business idea and its goodwill by licensing the right to use its trademarks (IP) and brand to an independent entity, while also providing an operating system and support.
There are many benefits to franchising but what is involved and is it the right option for you?
Why would you franchise your business?
It can be an effective way to grow your business brand when you do not have the capital or personnel to expand yourself. Accordingly, a franchisor can indirectly invest in its business and spread the financial risk, but share the gains and knowledge of a successful commercial idea. As such franchising can be a very cost-effective route for scaling-up a business, provided that you can demonstrate that your business is successful and that it can be replicated and effectively managed in different locations.
What makes a good franchise business idea?
You need to show a proven track record; that the model and brand can be successful in more than one site or geographical area. Of course some businesses may thrive in one country and not another due to socio-economic or cultural differences so you must be able to reproduce the business and make money.
A hall mark of a good franchise idea is something that offers a unique selling point. There is likely to be some or a lot of competition in the marketplace. You will stand yourself in good stead if your franchise provides a new or different product or service, especially if that unique quality can be maintained or even better, evolved, over the years. That ties into the importance of product or service flexibility in that particular trade. Can your idea be adapted to meet the needs of different customers?
How to franchise your business
So you have an established business with good financial health and a strong brand. You have a tried and tested operating system in place which works and can be cloned. Through market research you have identified a territory, country or region, which is perfect for your franchise.
Now it is time to get organised and drill down the process of exactly how your business operates in the shape of a written manual as your franchisees will need to reproduce this in order to establish their own enterprise.
You will also need to compile financial information or a pack to advertise the virtues of why a franchisee should invest in your franchise and not another more established brand.
You then enter into a franchise agreement whereby you licence your IP and provide the structure, whilst protecting your reputation with indemnities, governing terms and monitoring processes.
Seek legal advice
You will need to discuss the terms of the franchise and carefully document these in a contract ‘The Master Franchise Agreement’. What will you be offering and for how long? For example, will you permit assignments, do you need an option to purchase back the franchise under certain circumstances and will you be offer any help in sourcing retail space? It is useful to go through your liabilities and obligations with a specialist franchise solicitor from the outset to avoid the pitfalls that many franchisors encounter.
If you are discussing and providing confidential information such as client data, inventions or new ideas you should make sure that potential franchisees sign a non-disclosure agreement, which should help prevent leaks that would damage your valuable business.
Assuming that you own the intellectual property related to the brand or have the rights to use and licence the use of them, you should discuss with your solicitor how to preserve your brand through copyright or trademarks before you embark on this route.
Remember the brand is a crucial part of any franchise and its image and reputation must be protected. If you have your IP registered in the UK where you operate do not forget to extend this to Europe or further afield if you are going to franchise abroad, check the IP is available in that country and class, before progressing too far.
Other documents that you may need for which you will require a specialist solicitor for include deposit agreements, heads of terms, side letters, leases, employment contracts and policies.
What makes a good franchisor?
- One who offers a strong brand that is easily identifiable and a willingness to do anything to protect and develop it.
- A good franchisor recognises that time and money are required to ensure that the operating system remains relevant and efficient, after all this is essentially what the franchisee is ‘buying’ other than the right to use the brand.
- An understanding that the interests of a franchisor and a franchisee are aligned. There is no point making life difficult for a franchisee or promoting an agreement which solely serves the interests of the franchisor as this does nothing for the brand and ultimately little to help a franchisor increase profits in the long term as the franchisee business is likely to fold.
- A big effort is made to keep investment or buy-in low enough to ensure that the franchisee business is competitive
- A supportive environment and comprehensive training and marketing programmes to ensure that franchisees hit the ground running and continue to thrive
- A careful and selective approach to choosing their franchisees. It is important to seek out the right fit for a franchisee. The franchisee must believe in the brand. Franchises, like companies and firms often have a ‘culture’ associated with them. It is crucial that a franchisee is the ‘right fit’ and vice versa.
What makes a good franchisee?
- One who displays confidence in the system by faithfully sticking to the processes set out in the manual and a willingness to follow directions
- Is enthusiastic and believes in the brand
- Aware that people buy from people and that personality plays a big role in winning customers so our transparent and engaging in the process and development
- Realises that their staff are their most important asset and that treating staff appropriately helps to pave the way to success
Any other tips?
Don’t force growth at any cost and don’t take on franchisees who don’t have sufficient working capital to see them through. Be selective as to who you take on as a franchisee.
Consider what your long-term plans are and whether you would like to eventually sell the franchise, as it helps to structure contracts and agreements in a particular way to facilitate this.
Careful planning from the outset will also make seeking investment in your brand easier when the time comes and you look to expand further.
Above all, make sure you have a good lawyer and accountant to support you on this journey.
About the author:
Karen Holden is the founder of A City Law Firm.