At a time of tentative economic recovery, franchising can enable business owners (‘franchisors’) with a good product or service to expand without a large capital outlay and also allow buyers (‘franchisees’) to trade with an established name and format from the outset.
However, franchises range from McDonalds to small plumbing operations. Any prospective franchisee needs to ask some critical questions, such as:
• Who is the franchise owner? Check financial soundness and track record and, If possible, talk to existing franchisees to find out more about it.
• What are you buying? Typically, licence to use a business system, with manual and associated intellectual property rights such as trademarks, but query whether the brand is sufficiently strong and whether there is adequate training and other backup.
• What are you paying? Generally, an upfront lump sum and a continuing licence fee, either fixed or based on turnover, but beware of extra costs for administration, management or marketing.
• Where are you trading? Usually, a territory is granted, but this should be exclusive to you and include the right to follow outside leads.
• What are your duties? Always extensive and often onerous, including sometimes the obligation to take on business tenancies.
• How long does it run? As soon as a franchise contract expires, goodwill in the business reverts to the franchisor, so adequate provision needs to be made for rights of renewal.
• When can it be sold? Once the franchisor’s conditions have been fulfilled, which may include substantial application fees and rights to a percentage of the purchase price.
Effectively, a franchise business is only loaned out to a franchisee and ultimately ownership returns to the franchisor. It is therefore vital that you are confident from the outset that you can satisfy the terms of the franchise, in order to continue to run it and receive the income it generates.
For more detailed information or for advice:
Tel: 01473 230033