Posted Thursday 14th March 2024
“Franchise, franchise the thing. It’s too damn good to just be one location. There ought to be a McDonald’s everywhere. Coast to coast, sea to shining sea.” – Ray Kroc, The Founder
At Joelson we are often approached by clients who have built up a successful business and are looking to expand and begin their next phase of growth. That might mean organically building a customer base, opening international offices or building a shiny new factory. For some businesses, particularly those in the food and beverage, fitness and hospitality sectors, franchising can be a suitable and highly lucrative business model which can enable explosive growth when done correctly.
First off, franchising isn’t for everyone and it isn’t a good fit for every business. It is best suited to enterprises which require physical locations – such as restaurants, gyms and children’s entertainment – and which already have a proven track record. It rarely makes sense to attempt to open a franchise model before you already have a few locations up and running, not just because a track record helps to prove to potential franchisees that the business is a good one, but also because you need to know your business inside out before you start franchising it.
So, you’ve got a successful business and you think franchising is the way forward. In this article we explore what you need in order to start franchising and we set out some of the key legal considerations.
One of, if not the most, important things to get right when you are setting up as a franchisor is to ensure that you have your IP protected and ready to be licensed. A franchise hotel’s biggest asset isn’t how the staff are trained or how soft the beds are, but the name above the door that everyone recognises and trusts. IP includes the obvious things like business names and trademarks, but also written content, photographs, smartphone apps, software, know-how, production methods and even design rights in staff uniforms. Before getting started we therefore always recommend that you:
Franchise agreements form the foundation of the relationship between franchisee and franchisor which set out the rights and obligations of the parties, the IP licenses, restrictions on the franchisee and, most importantly, your fee. If a franchisee is being granted exclusivity within a certain area, the franchise agreement is where it should be set out.
The best time to prepare a franchise agreement is usually when you have identified your first serious potential franchisee. You can, of course, set a template up beforehand, but if you struggle to find a franchisee then you will have wasted your cash and having a test subject usually makes for a more rounded agreement. Once you have your first agreement in place you can then use it to create a precedent which can be used with future partners. It is important to try to stick to your standard as much as possible – if you have 50 different franchisees each with a different agreement then administering the business becomes a nightmare. For that reason it is generally best to take a balanced approach when drafting the first agreement/template to avoid the likelihood that future partners will want to amend it.
Franchise agreements are typically complicated documents with a number of pitfalls so it is certainly wise to engage an experienced solicitor to assist rather than attempting to hash something together yourself – get it wrong and it could kill your business.
There are a multitude of options when it comes to structuring a franchise fee and, at least in England and Wales, you have very few constraints in setting your fee other than commercial pressure. Some approaches we have seen include:
Franchise fees should always be set out in a binding franchise agreement so that you (i) can ensure that you will be paid (and paid on time); and (ii) reduce the scope for any disputes with your franchisees.
Every franchise business needs to set strict operating procedures and standards in order to ensure consistency across locations. The franchise manual is where this information is typically set out. If you’re a setting up a restaurant franchise for instance, you need to set out detailed recipes, food hygiene standards, service standards, dress code, restaurant fitout requirements, location requirements and everything else that makes your business what it is.
The franchise manual is typically referred to in the franchise agreement, together with the consequences of breaching it and dispute resolution provisions.
Franchisees and their staff will need training prior to any location being opened and continual monitoring and retraining to ensure that the standards are being met. This often constitutes a large portion of the work of a franchisor.
One of the major disadvantages of operating a franchise is that the franchisor lacks direct control over the operation of the franchises. If the franchise manual and agreement have been set up properly, they will incorporate provisions for rectifying any performance or staff issues and set out the basis on which an arrangement can be terminated.
This article sets out just a handful of general considerations and isn’t intended as legal advice. If you have any questions on regarding a franchise agreement or if you require any assistance with the preparation of a franchise agreement then please contact Guy Francis (guy.f@joelsonlaw.com).
Before joining Joelson, Guy spent five years living in Beijing and working as the commercial director of a franchisor business operating over 30 stores across Mainland China.
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.
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