In these days of increased nervousness in taking risks or in launching in new markets, those seeking to expand their business might want to consider using the franchise model as a means of growing their business.
How Does A Franchise Work?
Franchising usually involves the owner of a tried and tested business model (the Franchisor) licensing its business methods and brand to third parties (Franchisees) in return for a franchise fee. The parties sign up to a Franchise Agreement which sets out their rights and obligations and gives the Franchisee the right to use the logo and brand of the Franchisor for the specified purpose. The Franchisee is often provided with a franchise manual which sets out the methods for running the business. The manual generally includes information ranging from how the products or services are to be provided to customers, to how the Franchisee should train its staff, to setting the colour scheme and branding of the trading outlet.
What Is A "Master Franchise"?
In a master franchise arrangement, the business owner appoints a 'Master Franchisee' who is given the right to grant sub-franchises in a designated territory. The Master Franchisee has the primary interface with sub-Franchisees. He is generally responsible for sourcing and signing up Franchisees and for training and supervising those Franchisees in the operation of the franchise.
What Are The Benefits For A Franchisor?
1. Business Model
The Franchisor / Franchisee business model is one that has been proven in the market place and which has grown in popularity as it can work well for both the Franchisor and the Franchisee. A successful franchise requires a good business idea that has been proven to work in the past. By creating a Franchise Agreement, the Franchisor can set out clearly its expectations of the Franchisee.
In creating a Franchise Manual, the Franchisor can exploit the know-how and experience he has developed in his business without having to get too involved in the day-to-day running of the new operation. The disclosure of the business know-how is protected by strict confidentiality obligations and will often also include non-competition obligations for the Franchisee, should the relationship come to an end.
2. Faster Expansion Of Business
Using the franchise model may enable a business to expand to wider territory and markets than might otherwise be possible if the Franchisor were to finance such expansion from its own resources. Again, as the Franchisee effectively funds the costs of establishing the new outlet, this allows the Franchisor to expand the business more quickly while controlling the rate and method of such expansion. The Franchisee on the other hand gets the benefit of a tried and tested formula for business and the consumer recognition that comes with being part of an established brand.
3. Exploitation Of A Developed Brand
Use of a franchise model enables a Franchisor to get his brand out to a wider audience quicker than may have been possible with organic growth of his business, all the while controlling the way in which the business develops and how his brand is used. In the right circumstances, an increased market presence will help to grow the value of and goodwill in the brand, increasing the value of his business. The Franchisor will set standards for the Franchisee to ensure that the value and quality of the brand is maintained at all times thus maintaining control of the exploitation and direction of the branding of the franchised business.
4. Lower Cost & Risk For The Franchisor
As the Franchisee takes on most of the start-up costs of establishing the new franchise, franchising can be a relatively low-cost method of expansion for the right business owner. While there are costs for the Franchisor in creating the template franchise agreement and the franchise manual, which are typically very detailed agreements tailored to the particular business, these documents can then be rolled out for use with all future franchisees in the franchise network. At the same time, the Franchisee is responsible for acquiring suitable premises (acceptable to the Franchisor), the purchase of all stock, the recruitment and training of employees and the general day-to-day costs of establishing and running the new franchise outlet.
The Franchisee may also pay an up-front "franchise fee" to the Franchisor on signing the Franchise Agreement and generally pays a percentage of its gross earnings to the Franchisor in return for its ongoing use of the trademarks and business method.
What Do You Need To Consider If You Are Thinking Of Franchising Your Business?
- Is your business right for franchising? Have you established a successful formula for business that can be distilled for use in a franchised business? Your business formula will need to be translated clearly into a legal franchise agreement, so that both parties understand and agree what is expected of them.
- Do you have a strong, recognisable brand? Have you registered your trademarks? Do you own the intellectual property used in the business and do you have the right to exploit it and license it? We assist clients vet their brand and other intellectual property assets prior to launching franchise systems.
- Who will be your Franchisee? It is important to ensure that you find the right franchisee and that you carefully vet any prospective franchisees – check references and public records, do they have relevant experience and capital?
- Do you want to be a Franchisor? You will be expected to spend time advising the franchisees and supporting the franchise network. You will need to prepare the Franchise Manual and to monitor and encourage your franchisees on an ongoing basis. You will need to ensure that you are getting the franchisee's "buy in" to the business and your vision of it from the start and that they will be willing to stick with it, even in more difficult times. A failed franchise can damage your brand, as well as cost you financially, so it is in everyone's interest that the franchise succeeds.
- Be careful about how you provide information to any potential franchisee. An effective non-disclosure or confidentiality agreement should be put in place before you provide any commercially sensitive information on the business to a potential franchisee. We can provide you with suitable documents to protect you during the negotiation period.
- Ensure that you are happy with the terms of the Franchise Agreement. The courts have demonstrated that they are not keen to imply additional terms into a detailed franchise agreement. In Jani-King GB v Pula Enterprises (2007) the court indicated that in a "complex commercial agreement of this sort" where the parties have gone to the trouble of setting out the terms agreed between them, the court would be slow to interfere to imply additional terms. (In this case, the court refused to imply an obligation on the Franchisor to act reasonably in exercising its discretion under the agreement or a right on the part of the Franchisee to terminate the agreement on giving reasonable notice (where the agreement was for a fixed term with clear provisions for early termination which didn't include such a right)).
What Can LK Shields Solicitors Do To Help?
We at LK Shields solicitors have considerable expertise in the area of franchising. We have advised clients (both Franchisors and Franchisees) on the drafting and negotiation of franchise agreements and other relevant documents, such as lease agreements for suitable premises. It is important to get the franchise agreement right from the outset.
As well as the advantages of franchising mentioned above, there are risks involved in having a third party Franchisee involved in your business model. Care needs to be taken to understand and manage those risks appropriately in your agreement. We have advised and prepared many clients in this area. We have also helped resolve and deal with disputes and infringement actions.
LK Shields Solicitors is one of the leading law firms in Ireland. Founded in 1988, today we number some 23 Partners, 70+ fee earners and 130 staff. Our principal areas of practice include corporate, litigation and dispute resolution, commercial property, intellectual property and technology, financial services, employment, pensions and employee benefits.
© LK Shields Solicitors, September 2009. All rights reserved.
The material in this publication is for general information purposes only. Professional legal advice should always be sought in relation to any specific matter. No liability will be accepted for any losses incurred by those relying solely on this publication.