Becoming a franchisee

To run a small business and most of all, to keep it going, is a challenge which should not be underestimated. It takes hard work and a long time to get a business up to speed and start making profit and there is no certainty that the business will succeed.

A franchise is considered to be a more secure way of starting a business. A good franchise opportunity offers a proven business format with an initial and continuing support framework which helps build both capital and earnings. The owner of a business, the franchisor, will grant a franchise licence to a local operator, the franchisee, which will entitle the latter to trade the business under the franchisor’s brand and to use the franchisor’s already developed and proven business system.

Profits are not guaranteed but the business is more likely to succeed as it has already been tested and approved. Moreover, franchisees will benefit from national advertising campaigns and from customers’ reliance on the brand name.

To start a franchise, one needs to pay an initial fee to the franchisor which should cover the cost of establishing the franchisee in business with a small element of profit to the franchisor. The franchisee must therefore consider the need for a bank loan to start the franchise. The franchisee must also ensure that the business has the potential to be profitable by consulting previous trading figures and checking their veracity. During the franchise licence period, the franchisee will need to pay continuing fees for ongoing support. Those fees can be based notably on a flat rate or on a percentage of the turnover. They will be payable monthly in most cases to facilitate control on sums. A marketing contribution which will usually be a percentage of the turnover may also be charged by the franchisor.

Usually franchise agreements are for long initial periods so that the franchisee is able to recover his initial investment and start to make a profit.

The franchise agreement details the way in which the business should be run by the franchisee and includes confidentiality obligations, accounting and reporting requirements, control on staffing levels and insurance. Under EU competition law the franchisor cannot oblige his franchisee to sell any product or service at a particular price, although he can make recommendations under relevant provisions. The agreement should consider whether the franchisee should be obliged to purchase all ongoing consumables exclusively from the franchisor. When there is an exclusive purchase obligation then the term should not be longer than 5 years to avoid a potential breach of the relevant competition law.

The franchisor, for his part, must provide support, advice and training for the franchisee and his employees. He must use the ongoing fees for advertising, product development, and promotional activities.

The agreement should contain non-compete provisions to prevent former or current franchisees from competing with the franchisor or other franchisees. Agreements can also include a right of renewal generally conditional upon the franchisee’s compliance with the contract, the completion of refresher training and the agreement of updated terms.

Franchisees should have a right to sell their business subject to the franchisor’s prior consent and generally conditional on the franchisee being in full compliance with his obligations and paying for the franchisor’s expenses and costs of training the purchaser. Most agreements allow the franchisor to have a right of first refusal to buy back the business on the same terms and price offered by the purchaser.

Most termination clauses in franchise agreements are one-sided: they allow the franchisor to terminate for the franchisee’s breach. It is a guarantee for the franchisor that the franchisee will not terminate the contract and set up a new business in competition with him thanks to the training and know-how the franchisee has acquired. But the franchisee can terminate the contract if the franchisor fundamentally breaches the franchise agreement.

In conclusion, franchising enables people to own their business and to be responsible for it however, the franchisor retains control over the way in which products and services are marketed and sold and controls the quality and standards of the business. Franchisees are therefore not left with much liberty to run their business and should not expect to implement their own original ideas without approval from the franchisor.

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