Wake-up call – Why franchising could be a good business opportunity

02 March 2012
Wake-up call – Why franchising could be a good business opportunity

Thinking of franchising your business? Legal expert Babette Märzheuser-Wood explains what needs to be done and the potential risks involved

The Problem
Hotel and restaurant operators often receive enquiries from customers that admire their brand and wish to apply for permission to open a duplicate business in their country. This is otherwise known as a franchise.

It can be a fantastic opportunity but there are risks associated with franchising that must be weighed carefully against the potential upside. The risks fall into four broad categories:

â- Financial risk.
â- Risk to brand integrity.
â- Legal risk.

The Law
Over 40 countries have franchise laws ranging from disclosure and registration requirements to laws that expose would-be franchisors to potential liability for damage caused to customers by the franchisee. In the USA, the sale of franchises is treated like the sale of securities and severe penalties can be imposed on companies that break these laws.

In other countries such as the UK or the Middle East the position is more benign. All that is needed in those countries is a good quality franchise agreement that covers all the legal and commercial angles.

Proper registration of your trademarks in your target markets is another key legal requirement. To grant a franchise in a country where you do not have a registered trademark can create a threat for the longevity of your business. The franchisee could walk away with your intellectual property and know-how free of charge and you may not be able to do anything to stop them.

Expert Advice
If you are seriously considering a franchise, you will need to invest in a number of preparatory steps to ensure that you do not fall foul of franchise laws.

First, you should register your trademarks in your target countries. Next you need to put in place detailed documentation. This comprises:
â- An operating manual.
â- A prospectus and disclosure document.
â- A franchise agreement.

Finally, you need to consider how you will train, support and supervise the franchisee. In addition to hands-on training in one of your facilities, you will need to have a dedicated member of staff to answer questions and make regular visits to the franchisee(s).

The value proposition Companies ask us: "Can I franchise my business model?" More often than not, the answer is yes. However, these companies need to ask a second crucial question which is: "Can I franchise my business profitably?" For franchising to work as a business model, the franchisor needs to create value for both the franchisor and the franchisee. This is called the "value proposition".

The margins need to be such that after payment of franchise fees the franchisee can still make a meaningful profit.

Check list
If you feel that your brand has what it takes to create a successful franchise, these are the steps you should follow to take matters forward:
â- Register your trademarks.
â- Financial modelling to create the "value proposition".
â- Franchise agreement prepared by specialist franchise lawyers.
â- Devise and document a training programme and operational manual.

Once you have put together your franchise model, you will be eager to meet with prospective franchisees. At this point it is tempting to explain the secrets of your success in order to persuade them to join forces with you.

Unfortunately there are individuals out there who will use this opportunity to gain access to as many of your trade secrets as you are willing to divulge without committing to the franchise. There is a risk that they will simply copy your ideas.

To protect yourself from this form of "idea theft", it is important to insist that would be franchisees sign a confidentiality and commitment agreement before any meaningful information is disclosed.

To protect you from time wasters you may also wish to ask for a small deposit or commitment fee.

Babette MÁ¤rzheuser-Wood is a partner at Field Fisher Waterhouse

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