Thinking of franchising your business?

Roger Levitt, of Cubism Law, highlights the many elements to consider when taking the franchise route to expansion

Franchising is a complex process and you need to get it right from the beginning. So, before you start, you should consider the following:

What is franchising and why choose it as a way of growing your business?

Business format franchising is the granting of a licence by one person (the franchisor) to another (the franchise owner – sometimes know as the franchisee), which entitles the franchise owner to trade as their own business under the brand of the franchisor, following a proven business model.

The franchise owner also receives a package, comprising all the elements necessary to establish a previously untrained person in the business, and to run it with continual assistance on a predetermined basis (including a predetermined agreement length – with renewal options).

Franchising can not only strengthen the brand and reach of a company, but it can also act as a very good method of securing its future, but only if done well.

Franchising does not fix a bad business. It is not there to provide injections of capital and income from other people to underpin a failing elsewhere. Franchising is a model used to replicate a successful and proven business, using the investment and skills of new individual business owners, who will be trained and supported to run the business under the agreement, conditions and format, as proven and agreed.

Many types of businesses use franchising: it has well established itself as a respected and highly regarded business model.

To franchise a business requires a considerable amount of thought and planning. To start with, the business needs to be proven – you need to show potential franchise owners that the business works in the way in which they will need to run it. It also needs to be transferable, so that it can be run in multiple locations, using the same system, brand and quality. You need to be able to teach people how to operate the franchise. If only you can run it, that won’t work.

You need to make sure it is protected, by ensuring you have all the correct documents to secure your brand with any appropriate legal and financial advice from experienced franchise advisers.

Is franchising necessarily the way forward?

Setting up a franchise will require a considerable investment on your part, in time, effort and money. Are you being realistic about the chances of your business succeeding as a franchise? Have you considered if you might be better to proceed by a licence, distribution agreement or by company expansion?

What are you offering?

Do you have a viable business or just an idea? Do you know which elements of your business can be franchised, e.g. trading names, logos and branding, methods and format, know-how? Have you protected your intellectual copyright in these?

Ideally work with an experienced Franchise Consultancy company, who will produce an evaluation analysis and outline franchise development business plan for you.

Review your plans with your accountant

Arrange to meet with your accountant to confirm whether the financial projections in your franchise development plan are realistic and achievable.

You must have a clear idea, from the outset, how much investment is required from you and any funding source, as well as how much you are likely to make. You should allow at least for equipment, staff and recruitment costs, legal, accountancy, consultancy and possibly surveyors fees, bank facility fees if you are seeking funding, working capital and your need for an income before you have built the business.

Be realistic about your earning potential and those of your potential franchise owners. Make sure any income projections are based on real experience. This list is, of course, not exhaustive and will depend upon your own circumstances.

Will your business work as a franchise?

It is essential to establish a pilot scheme to show to potential franchise owners that your business works in a franchise context, usually for at least 12-18 months. This will demonstrate the business is not only viable, but it’s a viable franchise business. It will also enable you to identify and solve any problems, and help you develop an Operations Manual which details the way in which you operate your business.

Attracting the right franchise owners

A business’ most important asset is its reputation, embodied in its management team and franchise owners. One ‘bad apple’ can cause serious damage. Therefore, make sure you thoroughly assess each potential franchise owners suitability through an extensive interview and selection process.

Managing your business

In piloting the franchise you will develop and refine a comprehensive Operations Manual setting out how the business operates. This will ensure that all your franchise owners follow the same systems and procedures.

How will I document the relationship?

Ensure the Franchise Agreement is prepared by a solicitor experienced in franchising so that it protects your interests. Having a Franchise Agreement and supporting documents that are technically and commercially correct, fair, and clear is crucial, as you are creating a binding legal contract which contains rights, liabilities and obligations for both you and your franchise owners.

Don’t underestimate the hard work needed

You’ll need the right abilities and personal attributes and a willingness to work hard. Not everyone is cut out to be a franchisor. It certainly isn’t an easy option and it’s not a ‘get rich quick’ option.

The franchise package will usually include training, advertising and administrative back up and support as well as general guidance from the franchisor.

Once your relationship with a franchise owner begins, work hard to keep it going, ensure that you are accessible and responsive when asked questions and when dealing with potential problems. The franchise owners will also have invested a great deal in the business. Help them to make your, and their, business a success. Like most things in life you’ll get out what you put in.