Franchise agreements

18 May 2006
Franchise agreements

The Problem
I have heard that a franchise can be an excellent way of getting into business and that a good franchisor will provide support and training to ensure that its franchisees succeed. I have several years of experience managing a restaurant for someone else. I'd like to run one of my own. I have been offered a franchise but it seems very expensive. How do I know whether I am getting a fair deal?

The law
Many countries have specific franchising laws to provide some protection to franchisees against being misled by franchisors, but at present the UK does not operate any such form of regulation. However, European and competition law are relevant, as well as the Trade Schemes Act.

Franchise agreements are usually presented to potential franchisees as fixed and non-negotiable, and often this will be the case. As a franchisee might have to pay a five-figure sum as an initial fee for the franchise, it is important to take legal advice on the terms and effects of the agreement before deciding to go ahead.

Expert Advice Potential franchisees should assess a franchisor's track record. A successful business model is only the start. Has the business been successfully franchised before? Can you talk to existing franchisees? What sort of information has the franchisor provided, and is it sufficient for you to make a decision?

Franchising can be a good way in to self-employment, as you retain the support of an established business with its own tried-and-tested systems, which will act as a mentor and will assist in promoting its - and, therefore, your - name.

The potential rewards might not be as high as they can be with your own business, as you will never own the brand, but they can be very worthwhile.
At the end of the franchise, provided the agreement has been drawn up properly, you ought to have a saleable enterprise based on the goodwill you have built up in the franchise.

However, even though you might be inclined to think of the franchise as your own business, the franchisor is likely to retain a substantial degree of control over how you operate the business, and failure to follow the franchisor's rules can ultimately lead to loss of the franchise.

Check list

  • Fees: there is likely to be an initial fee to cover start-up costs. There might be ongoing fees to provide for marketing costs or the use of the franchisor's trademarks. There is also likely to be a fee for the franchisor's ongoing advice and support. This is sometimes a percentage of revenue but can be a fixed fee.

    One view is that it might be indicative of a good franchisor if the initial fees are kept lower and more is taken on the ongoing fees, so that it is in the franchisor's interest that the franchisee succeeds.

    Some franchisees would prefer to pay a fixed fee and take a greater risk that the business does not do well.

  • Right to renew or sell: before starting out, you need to think about how you want to leave the franchise. As a franchisee, you risk your own capital and are self-employed, so you should have the right to sell on the franchise when you wish to step down.

  • Exclusivity: you might feel comfortable if you have the exclusive right to be the sole franchisee in a particular area. Your solicitor should look carefully at any exclusivity provision to check that it fully protects you.

  • Performance and targets: a franchisor might impose minimum targets for sales or other criteria. You need to check whether they are reasonable. You also need to consider what happens if the targets are not met: if the franchisor is able to terminate the agreement, you will have lost your investment.

Beware! Be careful of entering into a franchise agreement with a franchisor which is not established. It might not have developed a successful method for supporting franchisees, and it will be unproven whether it has a business model that is suitable for franchising.

As a franchisee you depend on the franchisor for guidance, advertising, use of its name, etc, and so you should consider what you would do if a franchisor wishes to cease business or becomes insolvent.

ContactDavid Morrison
Rooks Rider
020 7689 7000

British Franchising Association
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