Nockolds Resources

Franchise Agreements

Franchising – the advantages and the disadvantages

Franchising is becoming an increasingly popular business model in the UK.  The number of franchise systems operating in the UK in 2010 was 897 which is a 15% increase from 2006.  The total turnover rose to £12.4 billion in 2010, again representing a 15% increase for the same period.

Thorntons have recently announced the closure of up to 180 shops over the next 3 years.  Those to be closed are all stores directly owned and run by the company.  It is hoped that they will replace the majority of those affected with franchised stores.  They have confirmed that they wish to expand their business partly using franchising opportunities.  
What is franchising? 

A franchise occurs when the owner of a business (franchisor) grants a licence to another person or business (franchisee) to trade under their name selling the franchisor’s products or services. 

The most common type of franchise is a business format franchise.  Fast food restaurants are an example of this e.g. McDonalds.  The other types of franchises are product franchises (e.g. Thorntons) and manufacturing franchises (e.g. coca-cola).

The franchisee will be required to pay an initial fee to the franchisor plus a percentage of the sales revenue.  They may also be required to pay further fees for marketing, training and possibly rent.
The Advantages

• There is less likelihood of failure than with a new start up business as it is based on an existing product, services or method.
• The franchisor will usually give you support and training.
• You will benefit from any advertising or promotion made by the franchisor.
• Relationships with suppliers are established creating an increase in your purchasing powers and a reduction in your operating costs.
• Existing brand names and trade marks can be used.
• Financing the business can be easier as banks may be more inclined to lend money to buy a franchise with a good reputation. 
The Disadvantages  
  
• Costs can be high.  As detailed above there is an initial fee plus royalties and possibly other fees for advertising and training.
• The franchise agreement will usually include restrictions on how you can run the business.
• Local goodwill may be transferred to the franchisor at the end of the franchise period.
How can we help?

Whether you are a franchisor or a franchisee it is imperative that your rights and interests are protected in the Franchise Agreement.  Franchise Agreements vary but should deal with the following:

• Duration (term)
• Geographical territory
• Fees
• Support by the franchisor
• Restrictions on the franchisee
• Termination
• Intellectual Property Rights
• Advertising/marketing
• Monitoring the performance of the franchisee
• Insurance

The Franchise Agreement provides protection for the franchisor and governs how the franchisee can trade.  With potentially large sums of money being invested it is vital that both parties obtain legal advice before entering into a Franchise Agreement.  Whether you require a new Franchise Agreement to be drawn up or a review of an existing Agreement we can help…   

 

Sarah Miles (profile) Sarah Miles Thursday 14th July 2011
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