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Friday 7th October, 2022

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Franchising – a strategy for growth?

Insight

Franchising – a strategy for growth?

U.K. lawyer and franchise expert Peter Manford discusses when and how to seek legal advice for entrepreneurs embarking on a franchisee journey for the first time

Over 900 successful businesses in the U.K. so far have taken the route of franchising as a means to their expansion, with nearly 50,000 franchise outlets providing employment for more than 600,000 people. Although not as common in the U.K. as in other countries around the world, franchising is still a significant sector.

Ambitious entrepreneurs often consider franchising as a fast way to grow. It can certainly be a profitable opportunity for those who get it right, and while the franchising journey is not for the faint-hearted, presenting management and other challenges along the way, it’s well worth the effort to do your homework.

Here are the key points to keep in mind when contemplating franchising as a business option, and the role that legal partners play along the way.

Before you seek a lawyer…

Despite my profession, my advice to anyone considering franchising is not to not go and see a lawyer straight away. Before jumping to this phase, you should first ensure that franchising looks commercially viable for your business. Develop a vision of how your business would franchise and really put it under the microscope.

Having a successful business is clearly a good start, but it’s not enough on its own. However, while not all businesses are ready candidates for franchising, a great many are potentially very suitable with the right tweaks. Retail and customer-facing businesses, such as shops and food outlets, are obvious candidates for franchising, but the principle can work well for many other types of businesses, too.

First, identify what your business does that’s unique or special. This is often not as easy as it sounds. Most businesses become ‘unconsciously competent’ over the years, developing skills and methods that work well but are hard to explain. In order to create a system or operations manual, you must be able to relay these methods and assess whether they can be replicated by franchisees. Can you explain and sell the way the business operates to them? Is it a concept that, together with your brand, people are likely to want to buy into? Of course, the stronger your brand, the easier it will be to sell it to others.

Ensuring consistency is vital. When franchisees buy into your brand, you become the brand custodian, not only for yourself but for all franchisees, with a poor or unsatisfactory experience in one outlet reflecting badly on all. The customer experience at all outlets should be the same to build a solid reputation. When consistency is achieved across the entire franchise network, a virtuous circle should result. The franchisor’s and franchisees’ actions combine to strengthen the brand, leading to the whole becoming greater than the sum of its parts.

To achieve consistency, the franchisor must ensure that franchisees do not depart from the franchise model, which is where the systems or operations manual comes into play. This is a live document, updated routinely in operational learning and experience and detailing all the skills, methods, and know-how needed to follow the franchisor’s formula of success. In order for the relationship to work, franchisees must strictly follow the manual, and the franchisor also trains them to do so.

A good time to seek initial advice is when you have some clarity around your vision. There are three key things to look for in those you trust for legal advice in franchising.

First is experience. There are no specific U.K. franchise laws and general contract and intellectual property law applies – still, franchising and the relationships it involves are unique and throw up a very specific set of issues. Your advisor should know what can go wrong, how to manage the risks, and how to help if they do.

Secondly, pick someone approachable and who communicates clearly. And finally, choose a lawyer who’s interested in and likes your business as they are more likely to support you proactively when challenges arise.

After initial advice, the first main legal task will be preparing your franchise documentation, particularly the franchise agreement which can be quite detailed, often running to 80 pages or more.

For a typical start-up franchise, finalizing these documents might take three or four weeks and may involve two or three meetings with successive drafts until the agreement is right. More complex arrangements will need more time, so in planning a franchise launch make sure you factor in the time needed for this vital legal work.

Legal documents must address concepts that may be hard to express in simple terms, but they should use the plainest English and be as easy to understand as possible.

The franchise agreement is important because it gives the franchisor legal powers to control and protect the brand’s use, allowing you to step in and control matters if things go wrong. It will address the franchisor’s right to payment, where the franchisee may operate, the use of branding and logos, and targets to be achieved.

Your lawyer will not write the system/operations manual for you, but in some instances may check it and comment if it obviously needs further work. As your franchise network develops, your lawyer should be on hand to advise and help with the range of issues and challenges that have the potential to arise.

Common challenges to overcome

You need to plan and resource thoroughly to successfully replicate your business. If you’re already busy in your own business, who will look after the franchising? You will probably need to hire people who have the right skill sets to manage this if you can’t.

One highly costly mistake is in making the wrong franchisee selection. Choosing the right franchisee is critical and is frequently the difference between success and failure. Good franchisors devote much of their attention and resources to getting it as right as they can.

Failing to manage franchisees closely enough – particularly in the early stages – is another route to problems. It’s really important to keep your franchisee on track, picking up issues early when they are typically easier to correct and before things go too far adrift.

Once a business starts franchising, common challenges for franchisors include franchisees failing to realize their franchise’s potential and not keeping to the franchise system closely enough.

The starting point for dealing with these matters is keeping a close eye on franchisee performance data and picking up on issues early on. The franchisor should communicate openly, and use its management and other rights proactively when appropriate.

The author

Peter Manford, corporate & commercial partner at the law firm Aaron & Partners, is a franchise expert and the first lawyer to obtain a Qualified Franchise Professional accreditation from the British Franchise Association

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