Franchising as an alternative business model is rapidly gaining ground. There are currently 8,500 distinct franchise brands operating in the European Union, with the UK seen as one of the strongest European markets for franchising (figures by the European Franchise Federation (EFF), which represents the national franchise associations from Europe).

It is hardly surprising that the franchising model has expanded exponentially in the business world. From the franchisor’s point of view, it is a very fast and effective way of expanding into territories with little capital contribution required from the franchisor, a way of boosting brand recognition and reputation, and it is the only model to get someone to work hard for you and yet pay you for the privilege!

From the franchisee’s perspective, with an established brand, they are to a large extent insulated from failure and the uncertainty of success in building up a new brand and business. The franchisee can draw on the experience, assistance and support from the franchisor, whilst still retaining some flexibility as an owner, provided they stay within the confines of the franchisor’s operating manuals and systems. Other benefits of franchising are that bulk discounts and funding are more readily available as suppliers and major banks are more supportive of good franchising.

But before rushing off to commit to this type of business model, a potential franchisee should take stock of the situation. Franchise agreements are, without exception, weighted very heavily in favour of the franchisor and most would not entertain any proposed amendments to their so called “standard terms”. The most common argument being that it is their brand and business they are allowing access to and with so many franchisees, logistically, it would be impossible to monitor so many different agreements if not dealt with on a “standard terms” basis. They consider this as justification for imposing extremely onerous obligations.

In most franchise agreements, there are usually provisions that compel the principal to work full time in the franchise, so this is not just for an inactive investor. Other restrictions may apply in respect of the franchisee not setting up a competitive business or inveigle an employee of the franchise, which may be an issue if you wish to set up your own business in the future or a family member is an employee (as often is the case in small business franchises).

Most franchisees are often locked into a franchise for a certain number of years (typically five) with little possibility of unilateral termination. Where the circumstances allow for renewal, there is a risk that the franchisor’s new terms may be more onerous. Should the franchisee wish to leave instead, the greater loss to the relationship would be to the franchisee, as the assets, the goodwill, the brand and even the operating method would belong to the franchisor. Even if the franchisee had introduced improvements to the business, it is more likely than not that the franchise agreement would express this as belonging to the franchisor.

Consequently, it is vital that a potential franchisee is aware of the risks and satisfies himself as to whether the above underlying assumptions are accurate. This would include consideration to the commercial justification of entering into such transactions e.g. whether the brand is established enough to justify the payments required by the franchisor, and whether the proposed location is suitable for the type / requirements of the business. Consideration should also be given to: the current number of franchisees in the franchise; the level of profits for a start-up franchisee of equivalent size to the franchisee’s intended business; the franchisor’s business plans; references from other franchisees or even to speak to other franchisees under the same brand; the location of the nearest other franchisee to the proposed outlet, to prevent unwelcome competition; and possibly to look into the franchisor’s finances and talk to the franchisee’s accountant on the level of sales that are needed to break even, taking into account the outflows to the franchisor.

The above is only some of the issues that a potential franchisee needs to be aware of. Specialist advice is highly recommended, as there are many complex areas to consider for a more informed decision.

Many franchisees have been very successful but a franchise is often for life, not just a business vagary!
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