Franchising: Is Franchising the Answer?

Offering controlled growth without the need for significant investment capital, find out how franchising could help you grow your business

Franchising: Is Franchising the Answer?

As a quintessence marketing tool, franchising connects successful growth with those that possess capital and business acumen to take the brand to the next level. Powerful data from the 2010 NatWest/BFA Franchise Survey reveals that the UK franchising industry stands at a significant £11.8 billion. Notwithstanding harsh economic conditions, UK franchise businesses continue to expand with 842 franchise systems identified, mean average turnover of £353,000 and average opening cost of £46,700. Yet, what leads to the durability of a franchise or the certainty of a successful concern?

Perhaps, why so many new businesses fail is that they simply run out of capital before they reach profitability and attain a positive cash flow. A franchisor will learn through error and omission, and en-route gain the insight to a thriving brand and successful business system. This does not, however, necessarily mean that the franchisee will not have his trials to face or that the franchisor model is ideal. The would-be franchisor needs to convince the prospective franchisee that it should invest in its brand and system rather than that of a rival or set up alone.

Even so, franchising offers the franchisor the best method for controlled growth requiring less investment capital from the franchisor while maintaining control over methodology and branding. Control is maintained by expressly integrating the operations manual into the agreement as well as building systems into the contract which permit him to undertake financial and operational audits on the franchisee frequently. A conscientious franchisor is likely to provide specialist training in accounting, marketing and advertising, ensuring the franchisee has the necessary tools to handle any day-to-day practical issues that may arise. A prospective franchisee may be an unproven beginner in operating a business in concurrence with the franchisor’s system.

Primarily, the relationship between the franchisor and franchisee is one of variance and conflict; the franchisee is expected to imagine and develop as an independent entrepreneur, yet he must simultaneously work within a defined framework and method. More often than not, the terms of the franchising agreement are final with the franchisee in less of a bargaining position than the franchisor. Any clarification sought from the franchisor should be provided for in a side letter. While, 84% of franchisees are predominantly satisfied in their affiliation with their franchisor, it will be futile to impose numerous obligations on the franchisee.

Nevertheless, there are common considerations for the franchisee to bear in mind: a prerequisite for a specific site; a grant over an exclusive territory; a term with option to renew that permits the franchisee to recover his investment and make profit; any continuing fees imposed by the franchisor; the franchisor as the only supplier of goods, equipment and material (with margins) to the franchisee; a minimum performance target with option for franchisor to terminate; limitations on assignment of the agreement; a breach of a fundamental term entitling the franchisor to terminate immediately; a proportion of the advertising costs and insurance premiums – all these things need to be weighed up by the franchisee.

Overall, franchising provides less of a business risk yet is something that offers rewards both the franchisor and franchisee.

Edward Daniel SolicitorsEdward Daniel, solicitor at Edward Daniel Solicitors in the City of London (EC3V). Edward is well known for advising high net worth individuals and entrepreneurs. 

This publication is a general summary of the law. It should not replace legal advice personalised to your particular circumstances and needs.

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