Franchising is an opportunity for growth, but business owners have to give up some control. There are several ways the law can offer protection.
Franchises are reporting record success in the UK. In 2015, the industry’s annual turnover was over £15bn, and it now employs over 600,000 people, according to a recent survey by the British Franchise Association.
The unique business model dominates the high street, KFC, McDonald’s, Costa Coffee, Subway and Starbucks all run on this model. Indeed, franchises account for 70% of McDonald’s restaurants nationwide.
Despite these successful examples, the fallout from some franchises has been well publicised. In 2011, American restaurant company Papa Johns took action to recover funds from their franchisee Elsada Doyley after she abandoned the business. Doyley successfully won a counter claim when the chain’s own figures on achievable turnover were found to be inaccurate.
But research suggests that franchise businesses have a lower failure rate than new businesses.With the proper documents and controls in place, a franchisor can expand its current business model more quickly and at a reduced price – most costs will be borne by the franchisee. Their commitment is almost guaranteed because, unlike an employee, they have a vested interest in how the business develops. From a legal perspective, there are some key issues to take into consideration when setting up a franchise:
Create a franchise agreement
One of the main stumbling blocks for a franchisor will be the potential loss of control over that part of the business. The franchise agreement should set out the controls by which the franchisor will seek to protect its business model. It should cover, among other things:
- The rights granted to the franchisee
- The fees involved
- The terms and duration of the agreement
- Obligations of the franchisee and the franchisor (likely to be more onerous on the franchisee)
- Employees and training
- Intellectual property rights
Franchisors will also have to reveal information about the business that may be confidential and sensitive so this should also be covered.
Create an operations manual
This is the second key document – it sets out how the relationship will work operationally, therefore reinforcing the terms of the agreement. At the very least it should contain:
- A summary of the existing network with an outline of the business philosophy
- A description of the system involved
- Operating methods and stock requirements
- Information regarding payment of franchise fees, financial reporting, general accounting and staff issues;
- Outlet (the store, layout, display and merchandising)
- Legal and ethical issues such as the relevant legislation to be adhered to and the franchisor’s policies such as anti-bribery
- The franchisor’s directory including information regarding the employees and job descriptions and important contact details
Protect your brand
The franchise is an extension of the original business and so it should be protected as it represents the brand being invested in. Franchisors should seek professional guidance to enable the business to take advantage of this asset before a problem arises.
Prepare for failure
So what if it doesn’t work?
A franchise arrangement may come to an end for a variety of reasons such as the breakdown of the relationship, a sale of the entire business or the franchisee deciding that the time is right to move on.
Specific termination provisions in the franchise agreement will govern what happens if the relationship breaks down. However, the reality of the situation in a franchise business context will be that the franchisor will want to terminate the arrangement as quickly as possible so as to minimise damage to the franchise network and to protect the brand and the IP. It will also be important to give some thought as to how to quickly fill the shoes of the former franchisee as soon as possible following termination.
Franchising comes with big risks so it is important to comb through the legal fine-print first, but the results can potentially be very rewarding.