Franchising for Franchisors

In the current climate, a number of individuals or small businesses are looking to purchase a Franchise as a way of developing their own business and income in a swift manner. Accordingly, a number of businesses are currently looking at how they could franchise their business model, in order to expand their reputation and brand without having to invest in their own business. But is this actually the case?

It will probably be useful initially to clarify what is meant by franchisor and franchisee.

The franchisor is the business or individual that sells the right to use its products or services to another business or individual. The franchisor:

• allows the franchisee to use a name which is associated with the franchisor;
• exercises continuing control over the franchisee; and
• provides assistance to the franchisee.

The franchisee is the business or individual that acquires the right to use the products or services owned by the franchisor. The franchisee agreement will then require payments to the made to the franchisor in return.

From the franchisors perspective, franchising can provide a number of benefits and advantages. It provides a business with the opportunity to secure distribution for its products or services more quickly than if it had to train up its own employees and develop its own internal marketing, sales and distribution organisation. Also, being able to utilise a franchisee’s capital will enable a business to expand more quickly than if it was required to find the funds itself.

Many businesses involved in the supply of goods or services motivate their employees by linking their remuneration to sales. Franchising takes this one step further by linking the franchisee’s financial well-being to the success of the franchisor’s business, therefore increasing the incentive on the franchisee to dedicate their time and effort to the business.

However, franchisors must also be aware that as a result of franchising they do inevitably suffer a loss of control. Whilst a franchise agreement will impose substantial restrictions on the franchisees, it is important to remember that they will be independent third parties who will be seeking to maximise their own profits, sometimes at the expense of the franchisor.

Additionally, as part of the process of training a new franchisee, the franchisor will have to divulge substantial know-how and information concerning its business. Again, although the franchise agreement will contain restrictions on the franchisees’ ability to make use of this information for their own purposes, these types of provisions are often difficult to monitor and enforce. It often therefore comes down to their being a strong relationship between the franchisee and franchisor which can take time to build and develop.

Finally, a franchisor must be aware that they can owe a duty of care to their franchisees and any prospective franchisees. The High Court has recently held that a franchisor must ensure that when they provide advice to a prospective franchisee, they must do so with due skill and care, and if they do not then they could potentially face a claim for damages.

It is vital therefore that any franchisor or potential franchisor is aware of their obligations and they have the benefit of a well drafted and considered franchise agreement, providing the maximum protection possible. Our commercial team have substantial experience in helping people set up a franchise and are on hand to assist on all aspects of franchising, simply call Mark Alexander for more assistance on 0800 310 2000.