In the first of a three-part series, corporate and commercial solicitor at London law firm IBB Solicitors, Sho Matsumiya, takes a closer look at the main advantages and disadvantages in franchising your business.
Most company owners at some point think about expanding and one of the ways to do so is franchising your business. Most successful franchises share the following similar, common business elements.
(1) A successful pilot business
The original business was successful on its own.
(2) Consistency, even when scaled up
In a burger chain franchise, for example, at the original store the burgers were produced on site, but as the business expanded to accommodate additional franchisees, production of the burgers will (for economic and other reasons) be moved offsite so that they can be delivered to franchisees who will all receive burgers of the same quality, and the product will therefore be consistent.
The business can be replicated in various places in the country or around the world with minimal adjustments to the original basic formula.
The skills and “know-how” of the business can be taught to the franchisees and franchises typically have a manual which sets out the trade secrets and know-how which all franchisees have access to and which is one of the two core documents (the other being the franchise agreement).
If your business shares the above elements, then franchising may be right for you, however, you should be aware that there are advantages and disadvantages to franchising your business, including the following.
- Your business can expand quicker as you gain the ability to distribute your business’ products or services at a much faster rate through more outlets
- As each franchisee is making a capital investment, that investment can be used to fund the expansion of the franchise itself
- As a franchisor with numerous franchisees, your business will become a bigger player with more muscle and greater buying and selling power which means that your business will have the ability to increase profitability
- A franchisee may take a course of action that is in their own personal best interests but which damages the reputation of the franchise as a whole. There are however legal and practical ways to protect against this
- You are voluntarily sharing trade secrets and know-how with third parties who may share that information with those who may use that information against your business. Again, there are legal and practical ways to protect against this
- As franchises are rely upon a standard system, if a change in direction or major amendments to that system were needed, it may take time for those to be implemented as franchisees will need to be re-educated and changes will need to be implemented with each franchisee individually. It is therefore important to keep a close eye on market trends and be aware of any developments which may affect the franchise in any material way and prepare for those changes ahead of time.
What do I do next?
If after having thought about it, a franchise model sounds like the right way to expand your business, then you should prepare a draft business plan for the franchise and estimate the cash flow and capital requirements necessary. Often, the process of thinking about the business plan will give you new ideas on how to improve your existing business.
You should also at an early stage obtain legal advice from a lawyer with experience in acting for franchisors who can guide you through the various issues to consider and the key franchise documentation – the two core documents for any franchise are the franchise agreement, which is where the franchisor’s key legal protections are documented, and the manual, which sets out the know-how and trade secrets of the franchise.
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