Franchise Success in the Recession
Franchise Businesses are more likely to thrive in a recession than a non Franchise Business. UK Franchise turnover in 2009 was 11.8 billion. Today there are approximately 465,000 jobs and 842 Franchises in the UK with over 34,800 franchised units (ref: Natwest/British Franchise Association Survey 2010).
A growing number of businesses have chosen Franchising as a cost effective and efficient means of expansion and individuals in turn see buying a franchise of a proven business safer than starting a new business from scratch. In order to achieve success, however, it is critical that a Franchisor or a person wishing to buy a Franchise considers carefully the structure and the terms of the Franchise Agreement and arrangements at the outset.
What is a Franchise?
A Franchise is an established business which expands by granting franchises to individuals to operate their business under the same name and with the same business process in different geographical areas. The Franchisor will exercise continuing control over the business franchises and provide assistance in return for an initial payment and periodic payments throughout the term usually based on turnover.
Setting up a Franchise
The first step is to prepare a business plan to map out your goals for the franchise which should specifically include :-
• Reasons to franchise
• Evidence or theory that the products or services are susceptible to franchising
• Breakdown of the management structure to support a franchise
• Any lender will need to see a business plan in order to finance the set up of a franchise
You will need to prepare a “user” manual for the franchise setting out the business formula and procedures to ensure that each franchise is operated in the same way to protect the brand and control quality.
Before rolling out a Franchise, it is sensible to start with a pilot franchise of not less than a year to establish if the business is a success in other areas, to:
• discover any problems
• to explore marketing methods
• define quality control procedures and
• determine staff and training requirements.
The essence of a franchise is that a Franchisor is providing a Proven successful business to Franchise.
The Intellectual Property in the goods or services of the business to be franchised, must be protected by registration where possible and then licensed to the Franchisee in the Franchise Agreement.
There is very little regulation for franchises at present and, therefore, it may be prudent to join the British Franchise Association, all members of which have to comply with the European Code of Ethics of Franchising, to give comfort to perspective franchises.
You should bear in mind the Competition Act which came into force in 2000 which prohibits agreements whose object or effect prevent, restrict or distort competition in the UK and the Enterprise Act which came into force in 2003 which allows investigation where there is a suspicion that trade has been restricted, which your solicitor will have regard to when drafting the Franchise Agreement.
Considerable expertise should be invested in the drafting of the Franchise Agreement to ensure that your respective roles, obligations and restrictions are clearly set out and are enforceable. Our franchise solicitors will be able to prepare this for you.
Why stop at the UK? If the franchise is a success, you can roll it out into other territories abroad. This can be done in a number of ways which we can advise you upon.
Advantages to a Franchisor
• The opportunity to secure distribution for products and services faster.
• A way to generate funds to expand the business by charging a franchise fee and an ongoing percentage of revenue.
• Motivating Franchisees by linking their remuneration to sales or taking this one step further by linking the Franchisee’s financial wellbeing to the success of the Franchisor’s business
• With an expanded business, comes increased purchasing power and a possibility to reduce overheads
Alternatives to Franchise
Franchise may not be suitable for your business but there are other ways to expend such as distribution and licensing arrangements which we can advise you upon and prepare
• Distribution - Appointing a third party to the market and distribute
your goods or services in another territory. The distributor buys the goods and trades under their own name.
• Licensing - Grant a license to a third party to use your know how
or intellectual property rights to produce and/or sell
Buying a Franchise
Buying a franchise offers an individual the opportunity to start their own business but without uncertainty as to whether there is a market for the produce or service. The Franchisor will have already established the brand and proved it sells. They will also provide ongoing support, training and marketing.
Things to consider:
• Is there a demand for that service/produce in your area?
• What is the competition
• Carefully calculate the set up costs, franchise fee and ongoing fees
• Contact other Franchises to gauge their experience of the business market
• Consider your future plans as most franchise agreements will contain restrictions of your ability to continue in that business area after the agreement has finished.
It is imperative (and usually a condition of the franchise agreement) that you seek legal advice on the terms of the franchise and in particular the franchise agreement before you sign to ensure you are aware of all of your obligations and the Franchisor’s expectations.
Our solicitors have considerable expertise advising on a range of Franchises from food services to products, and will be able to help you and advise you in all aspects of setting up a Franchise of your Business or buying a Franchise.