Becoming a franchisee can be an exciting prospect – particularly if you’re joining a well-known franchise, where you will hopefully benefit from the brand recognition and goodwill the franchisor already has.
But it’s important to be aware of the risks, as well as the benefits, of becoming a franchisee.
Successful franchises depend on uniformity – not just in how they look, but how their products or services are delivered and the overall quality of experience that their customers receive. To achieve this, almost all franchises will have an operating manual. This is a detailed set of instructions which the franchisor issues to all of its franchisees to tell them how to run the business. This can include everything from décor schemes and staff uniforms, to which suppliers you need to use for products and services you will buy for use in the business. It can be very prescriptive and you need to be comfortable that you’re happy to run the business in accordance with the manual.
You also need to bear in mind that the manual is always evolving and the franchisor will issue updates from time to time. You will be required to agree to any changes that are made to the manual, usually at your own cost. So if the franchisor decides to change its branding or its colour schemes, then (depending on the type of business) you will need to redecorate your premises, apply new decals to vans, change stationery etc.
Alongside the manual, you will also be required to enter into a franchise agreement. These are usually quite long, and usually very pro-franchisor. There will be a lot of rights of the franchisor and obligations placed on the franchisee, and not much the other way around. The main purpose of the franchise agreement is to protect the franchisor (and therefore the brand), and not necessarily to protect the rights of the franchisee. For example, if the franchisor feels that standards are slipping, there will be rights of inspection, supervision, remediation (all at your cost) and even the right to remove you as a franchisee. There is also usually little scope for negotiation of franchise agreements (other than commercial terms) as the franchisor will be keen to ensure that all its franchisees are contracted on broadly the same terms.
There are good reasons for this – if you are investing in a franchise, then it’s as much for your protection as the franchisor’s that every other franchisee is under the same strict rules as you, and is required to do everything they can to uphold the franchise’s reputation. If other franchisees are sloppy and the franchisor doesn’t take action against them, then the brand suffers and consequently so does your business.
The other key point to bear in mind is that you are likely to have personal obligations under the franchise agreement. Even if you intend to trade as a limited company (which is generally the case with franchisees) the franchise agreement will almost certainly contain personal guarantees to be given by you and any other owners of your business. This means that if your company fails to make its regular payments to the franchisor (e.g. management fees, advertising levies etc) then you could be on the hook personally. Be aware that franchise agreements usually have a fixed initial term of anything up to five years, and any attempt to escape early could result in hefty termination fees being payable (which again you could be required to pay personally if your company cannot pay).
For this reason, it’s important you do your research. Even if you’re joining a well-known franchise, ask to speak to existing franchisees about their experiences of dealing with the franchisor and ask to see accounts from some of them. Crucially, be certain this business will make money for you.
If it’s a relatively unknown franchise, then be more wary of lengthy initial terms and see if you can negotiate the right to escape early if it’s not working for you. Even more importantly, if it’s a very new franchise, and you’re acting as a “guinea pig” for the franchisor (often known as a “pilot”) you should be requesting preferential commercial terms and the right to leave early if it doesn’t work out.
If you want to discuss any aspects of franchising (whether as a franchisor or a franchisee), please do not hesitate to contact Matt Worsnop on 0116 281 6235 or by email on Matt.Worsnop@bhwsolicitors.com.
Categorised in: Corporate and Commercial, NewsTags: Commercial Agreements, Company Law, Franchise