Franchising · 20 July 2015

Guide to setting up a franchise

Training is one of the key elements a franchise needs to get right

A franchise usually involves the granting by one party (the franchisor) to another party (the franchisee) the rights to use a (1) brand and (2) proven business format and systems.

So the starting point for setting up a franchise is to:

(1) Establish the intellectual property (IP) that comprise the brand name and systems that are to be licensed

(2) Analyse and understand the financials behind the business so that a prospective franchisor can demonstrate the level of returns that can be achieved at the franchisee level

The IP

The IP comprises the brand, business model and systems. This means the following.

(1) The brand should be registered as a trade mark since a prospective franchisor should have clear and undisputed rights to license third party franchisees to use the brand name and/or logo that is associated with the business

(2) The Systems and business model should be written into a set of manuals (such as a training manual, an operations manual, a systems manual and a policies and procedures manual) which should give a full and detailed account of what a new franchisee is required to do to start and operate their business

In creating the manuals, a good starting point is to break the business down into two roles; the franchisor role and the franchisee role.

The franchisor role usually comprises (1) finding and recruiting prospective franchisees (including assessing whether they have the appropriate finance and skills to be able to operate a franchised outlet), (2) finding, contracting and managing any suppliers that may be required to deliver services or products to franchisees, (3) assisting the franchisees to set up their business (which may include helping them to find suitable premises and approving the fit out of those premises for launch), (4) training and supporting the franchisees so that they are well placed to start and grow their business and (5) managing and monitoring the franchisees to ensure that they are complying with the terms of any franchise agreement or manuals.

The franchisee role is usually focused on the delivery of the products or services to end customers. This will include (1) finding, locating and fitting out of appropriate premises, (2) launching and marketing the business, (3) recruiting and training the staff that are to be employed in delivering the products and services to end customers, (4) the general management of the operations of the business, (5) ensuring that the franchise is being conducted in line with the terms of any franchise agreement and manuals, (6) managing the financials of the business and (7) attending any ongoing training and liaising with the franchisor as may be necessary .

It is important that a franchisor ensures that the training and manuals are appropriate to enable a franchisee to implement its role within the business.

The financials

A key part of the franchise proposition is the underlying premise that it is a tried and testing system and business model. At the heart of this is the idea that, if the franchisee implements the systems and adheres to the manuals, they should be able to operate a profitable business and secure a reasonable return on their investment. It is important, therefore, that before looking to franchise its business a prospective franchisor analyses carefully the returns that are likely to be achieved by a reasonably competent franchisee.

In most cases, a prospective franchisor will carry out this financial analysis by operating a pilot operation for a period of time since this will allow them to iron out any potential issues and get a clear understanding of the likely financial returns that may be achieved.

Sometimes, the franchisor may look to franchise without strictly operating a pilot but using their current business as the example of a pilot operation. However, this will come at an increased risk since there may well be significant differences between the historical operation of its current business and how a franchised outlet is likely to be operated and be performed.

Clearly, the greater level of due diligence that is carried out by a prospective franchisor in establishing their franchise proposition, the more likely that it will become a successful franchisor.

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ABOUT THE EXPERT

Andrew Pena is a commercial litigator who has worked at well-known City practices. Having acted for major international companies and many recognisable high street brands, he now heads up Cubism Law’s franchise law practice.

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