Franchising is a well-tested business model that is used by many big brands and many growing brands as a way of expanding their business through independent organisations, while still keeping control of the brand and business system.
Franchising describes the arrangement where one person (a franchisor) grants to another (a franchisee) a licence to operate a business using the franchisor’s trading name, trademarks, know-how and business systems. Essentially, franchising enables a person with no previous experience or training in a business to operate that business.
Franchising can prove an effective method for expanding a business but franchisors have to accept an element of loss of control as the franchisees run their own businesses and franchisors are required to support and encourage them in this, to the mutual benefit of both parties.
A potential franchisor will often be operating one or more successful outlets of their business themselves before deciding to franchise – setting up a new franchise should be tested first with one or two pilot outlets, so that the franchisor can gain experience and gather data on performance before rolling out the franchise.
Some businesses are well suited to franchising; others less so. The key is a business that is ‘tried and tested’ and which is easily replicable – the operation of pilot outlets can be of enormous value in determining whether franchising a business is viable and by providing the franchisor with key information as to how best to successfully operate the franchise network.
With many businesses, there is often a temptation to offer franchises to their top employees given their knowledge of and involvement in the business being franchised, which is perfectly understandable. However, a good employee does not necessarily translate to a good franchisee – a top employee, while no doubt highly skilled at their job, may lack broader business skills. This can often be overcome with good initial and ongoing training for the franchisee and proper, full and close on-going support from the franchisor (see Training and ongoing support below).
Or it may be more advisable to look further afield at those with good business skills, even if they are not necessarily familiar with the franchisor’s industry. In such circumstances, a good manager can be employed to provide the necessary industry knowledge.
Either way, a franchisor should do its research and ensure that it is satisfied that the franchisee has the means, ability and dedication to run the franchise business both profitably and reputably and in line with the franchised business model.
Franchisors will need to provide potential franchisees with information regarding the franchise. However, care should be taken not to “over sell” and any information disclosed must be clear, accurate and not misleading. Many disputes arise due to the franchise business not performing to the financial levels that the franchisee felt they were led to expect from the franchisor.
If you’d like more information about what protections should be included in the franchise agreement, how to protect your IP/brand and more, please contact us for a copy of our guide.