What To Keep In Mind When Setting Up A Franchise

Franchise is a method of business expansion characterised by a trade mark license, payment of fees and significant assistance and/or control.

Before franchising a business, one needs to make sure the particular business is suitable for franchise. The business should contain substantial know-how and the products or services need to be competitive and distinctive enough for there to be a market for the franchise. It is also important for the business to have broad geographic appeal, allowing it to succeed in different parts of the country. The business should also be easily duplicated and relatively easy and inexpensive to run.

To make sure the business is capable of being replicated successfully, it is preferable for the franchisor to demonstrate the success of a franchise in a pilot operation. A comprehensive pilot operation establishes a franchise’s credibility, highlights potential problem areas and allows for alterations to the business model to be made. The pilot operation should last for at least 12 months and, to establish the geographic appeal, should be undertaken in different locations.

One also needs to have financial aspects in mind. An initial capital is a ‘must have’ when starting up a franchise as it can take a few years to start making money on the franchise operations. One needs to be prepared that hard work and long hours at the office will be needed during this period.

There are different types of franchise, the most common one being business format franchise, according to which the franchisee is using the franchisor’s complete method to conduct the business, including the franchisor’s product, service, trade mark, marketing plan and operation manual. There are also different types of franchise arrangements the franchisor can grant a franchisee the rights to open and operate one unit (single-unit franchise) or to operate multiple franchises and allow the franchisee to have his own sub-franchisees (multi-unit franchise). The first one is the simplest and most common type of franchise and the franchisor may grant one franchisee to operate more than one single-unit franchise.

A part of being a franchise is that all franchisees should be more or less the same. It is therefore important that the franchisor develops and checks the systems a franchisee will need to run their business successfully and to provide a comprehensive operating manual and training programmes for the franchisees.

As a franchisor, it is of great importance to protect the intellectual property rights in the business by registering trade marks and patents. The franchisor thereafter (usually) licenses these rights to the franchisees in a license agreement, which should include appropriate protections for the franchisor in respect of these rights. A confidentiality agreement should also be entered into to ensure that the franchisor’s trade secrets are protected.

The legal document, governing the relationship and specifying the terms of the franchise purchase, is called a franchise agreement and should set out the rights and obligations of the parties. It should contain all the key protections for the franchisor such as duration of the franchise, payments made by the franchisee to the franchisor and the use of trade marks and products. It is also common to include non-compete restrictions in the franchise agreement, both regarding the franchise period and regarding a specified time post termination.

The franchisor is building up a brand which other people are buying into. It is therefore the franchisors responsibility to make sure that the brand is not abused by third parties. Franchising is relatively unregulated in the UK, however, one can voluntarily become a member of the British Franchise Association, which promotes the practice of ethical franchising in accordance with its codes of ethics.

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