If you’re the owner of a successful and profitable business and it operates against a model and systems that you believe could easily be taught to others, then you might want to consider leveraging your success by setting up a franchise operation. Franchises exist in all market sectors and in a variety of different forms, from one-man operations (such as car mechanics and dog groomers) to bigger operations employing many staff (such as printers and restaurants).
While the effort involved to get started can be considerable and lengthy, the long-term rewards can be immense if you go about it the right way and involve professional help from the outset.
Benefits of setting up a franchise
Growing your business using the franchise method is an exciting and proven method to accelerate your business and, if you have the right business model and the right systems in place, there can be many benefits including:
- relatively low level of investment – franchisees must pay for their franchise so, essentially, you are using their capital to fund your business growth
- the power of duplication – once you have a successful business model in place you prepare one set of standard operational guidelines for each of your franchisees to follow
- quality business partners – you have ultimate control over who runs your franchises and the franchisees should remain motivated to succeed because they’ve invested upfront in the business
- effective quality control – each of your franchises will be following the same formula and have a contractual duty to maintain the same standards.
Disadvantages of setting up a franchise
As with any business expansion, there are difficulties and pit-falls to be aware of when thinking of starting a franchise operation.
- cost and effort involved in setting up. You’ll need to budget carefully as there’s an awful lot of work involved in the beginning, eg, clearly documenting your business model and systems, researching the market to see if your business idea is viable in other locations, producing information packs and operations manuals, marketing and advertising, interviewing potential franchisees etc
- difficulty in finding suitable franchisees – you need to apply rigorous selection criteria, after all, your success is dependent on them
- time and cost involved in establishing a suitable management structure – chances are your existing management team won’t be able to cope with a rapid expansion. Good management is critical to the success of a franchise operation and may cost a lot of money
- legalities – even the simplest franchise will require considerable involvement from an experienced lawyer. Having the right terms and conditions in place will be critical to the success of your venture.
Getting help from the outset
The first thing you should do if you’re considering franchising your business is to speak to an experienced commercial lawyer. It may seem like a big expense at the outset but it’s sure to save you money and heartache in the long-run.
Truelegal will guide you through the process and ensure that you make informed decisions. Most importantly, your lawyer will draft your franchise agreement – probably your most valuable business document. If you get the agreement wrong, rogue franchisees may ruin your franchise brand and reputation, or even copy your idea and start up in competition.
What to include in your franchise agreement
In essence, the franchise agreement will determine how enforceable your rights are against your network of franchisees.
Key to your success is having a set of terms and conditions that are sound, clear and fair – these are people that (hopefully) you will have a long-term working relationship with and you want to do everything possible to ensure that that relationship is a harmonious one. A poor franchise agreement could deter new applicants or leave you unable to get rid of a bad one causing you and other franchisees difficulties and problems.
The terms and conditions will vary from franchise to franchise but should include the following:
The term of the franchise agreement covers how long the franchise lasts, how it is renewed and on what terms. It also looks at how the franchise can be terminated early and may include performance criteria.
This is the geographic area which each franchise will cover. Will the franchisee have exclusive rights and how will the borders of franchise territories be covered?
Usually the franchisor will charge an initial fee, royalties on sales and a regular management fee. You may also want to charge for additional costs such as joint marketing.
The amount of help you provide is often critical for success both when the franchisee starts their business and on a continuing basis, as they progress.
Most franchisors place restrictions on what franchisees are and are not allowed to do. It is normal to stipulate how the franchisee should run their business. Minimum stock and staffing levels are common, as are where the franchisee purchases their stock and how much they can sell their product or service for.
What happens if a franchisee wants to sell their business, or what happens if they can’t continue in business for some reason – perhaps due to ill health or lack of funds? You will need to retain control over who they sell their business to.
- Other items which need to be considered include how “goodwill” is treated, provisions for insurance cover, and protection of your intellectual property rights.
From your perspective, a franchise agreement should encourage good franchisees whilst providing positive, proactive remedies for those who are under-performing or causing difficulties for you or other franchisees. In addition, the agreement needs to allow your franchisees the right amount of freedom so that they feel the business is their own whilst protecting you from fraud, misconduct and the stealing of your intellectual property.
It’s important to provide the right amount of support for your franchisees but you must also make sure that this operation does not cost you too dearly in terms of resources and money.
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