2016 kicked off with McDonalds making the headlines again. For once, they were not related to the alleged harm the company causes to our waistlines and the environment. Instead, the multi-billion pound franchise has been accused of abusing its monopoly status in the market to squeeze franchises and exploit consumers in Europe.
In an action to come before the European Union, consumer groups in Italy have alleged that McDonalds have been breaching the rules of European Union by abusing its position as a landlord by levying exorbitant rents from franchisees which are 10 times higher than the market rates.
How the European Union will decide on this matter is anyone’s guess, but one cannot mention McDonalds without acknowledging the roaring success it has made of franchising its business model.
Franchising is a superb way of expanding a business which already has a successful formula. The franchise industry in the UK turned over £15.1 billion in 2015 and employs around 621,000 people.
If you are exploring the idea of expanding your business through franchising, this article is for you. In it, I will detail:
- How to start a franchise;
- Negotiating franchise agreements; and
- Maintaining a franchise.
Useful, I know.
How to Start a Franchise
Potential franchisor, before committing to the idea of a franchise, it is important to consider how your role will change within the business. Your franchisees will require guidance, direction, motivation and training, all of which you will need to provide in spade-fulls to ensure your franchise is a success. This is likely to dramatically change the way you work, and you may become less hands-on within your organisation.
Are you prepared for that?
If so, then one of the first things you need to do, long before you advertise for interested franchisees is ‘get your own house in order’. Setting up a franchise means that each franchisee will follow plans, policies and procedures set out by the franchisor. It is imperative, therefore, that as the franchisor, you have set certain standards and pricing for your products and/or services, in a way that can be easily duplicated in another location, by another individual. You then need to take the time to create a detailed manual, which can be updated regularly, on how a franchisee will run their operation.
You also need to protect your intellectual property (IP). If you have spent years building up your brand and created certain innovations within your industry, you need to protect yourself from franchisees that leave the network and try and set up independently, exploiting your ideas, trademarks and clients. By registering your IP, you will be taking the first step to prevent this from happening.
There are four types of IP you need to consider protecting:
- Patents: Protects inventions as well as new and inventive technical features of products and processes.
- Trademarks: A sign or symbol used by a trader to distinguish its products or services from those of other traders.
- Copyright: Protects original artistic, musical, dramatic and literary works.
- Design Rights: Protects the appearance of the whole or part of a product.
In 2009, KFC (one of the world’s largest franchises) upgraded its security in respect of one of the best-kept corporate secrets in the world. Whilst this was happening, Colonel Sander’s original, hand-written recipe for fried chicken was kept in a secret location for five-months. When it was eventually returned to KFC’s headquarters in Kentucky, it was delivered to a lockbox, handcuffed to a security consultant. The iconic recipe for 11 herbs and spices is now protected by an array of high-tech security gadgets, including motion detectors and cameras that allow guards to monitor the vault around the clock.
Negotiating a Franchise Agreement
Once you are in a position to advertise for franchisees, you need to think about the franchise agreement you will need to put in place.
A franchise agreement is a legally binding contract which will set out the rights and expectations of both the franchisor and the franchisee.
Key terms that need to be included in a franchise agreement include:
- The date the franchise begins and its length
- The franchise fees
- The franchisees marketing and advertising obligations
- Training obligations of the franchisor
- Staff uniforms
- Opening hours
- Directions on procurement and suppliers
- HR policies
- Selling or transferring the franchise
- Dispute resolution
- Terminating the agreement
- Renewing the agreement and whether or not the franchise fees will increase upon renewal
- Restrictive covenants
- Confidentiality provisions, etc.
Maintaining a Successful Franchise
Once you have a franchise agreement in place, it can all be put into motion. You have to ensure the franchise and your brand succeeds.
Some ways to promote the growth and success of a franchise include:
- As a franchisor, retain an ownership stake in each franchise
- Have renewal and duration terms in the franchise agreement that give you flexibility to appoint a new franchisee but allow for existing franchisee to establish business continuity
- Have bi-annual / quarterly site visits to each franchise to ensure standards and quality is maintained
- Ensure franchisees have the same promotions and discounts at the same time to allow for global marketing and maintain consumer confidence
- Allow customers access to the head office to maintain accountability and oversight
- Stay in regular touch with your franchisees with emails, newsletters, training days, etc.
Expanding via a franchise is a great way to gain easy capital to expand your business for relatively little risk. With detailed planning, a well-drafted franchise agreement and a strategy for long-term growth and profitability, franchising can be an ideal recipe for success.
Saracens Solicitors has the commercial acumen and expertise to guide you through the complexities of setting up a franchise. Our experienced commercial team will explain both the law and your position to you in a straight-forward, professional manner and advise you on the best steps to take.
To further discuss any of the issues raised in this blog, please phone our office on 020 3588 3500 to make an appointment.
Do you have any thoughts on setting up a franchise? If so, please feel free to comment below.