Franchising is the method the owner of a brand or a trademark uses to package assets (for example a brand name or certain ‘know how’) in order to offer them to a franchisee; normally for a fixed fee and then a recurring or marketing fee, based on sales. Franchisees then buy the right to the assets to establish their own business in a particular territory.
Franchising can just as easily relate to service business as well as the selling of a particular product or the running of a restaurant. McDonalds is a well-known example of a franchise business.
This is an agreement between the franchisor and the franchisee setting out the respective obligations and duties of each party. It will make clear the rights which are being licenced by the franchisor and will clearly set out the intellectual property rights and how these can be used. It will also set out the initial fee and also how other fees will be calculated for instance on the turnover of the business and whether they are payable on a monthly basis.
The agreement will also contain a very long list of restrictions and duties on the franchisee to be observed in carrying on the business.
As well as paying the initial fee and the recurring fees the franchisee will be required to adopt very strict and detailed procedures and standards often set out in a franchise manual. This will dictate the use of the intellectual property rights, how the premises must appear and how the products or services are to be sold. There will be specific instructions on how to prepare and submit accounts; on the training of the proprietors and new employees, and about restrictions on the franchisee in the event that the business is terminated or the business is sold.
These need to be considered very carefully. Very often the franchisor undertakes to do very little to actually help the business. Where there are specific obligations on the franchisor they are often vague and potentially very hard to enforce.
What do you do first? Firstly, if you propose to become a franchisee you must do your homework. A franchise agreement will make it clear that you are not entitled to rely on any financial representations by the franchisor, as to the financial viability of the business that you purchase. You will have to make your own assumptions and plans.
You must speak to and visit other franchisees to ascertain whether or not the support from the franchisor is all that is promised, that franchisees are treated fairly, and that the product or service is sufficiently well known and respected in the market place so that it justifies the fees to be paid.
Otherwise, although it might be harder work, in the long term it may pay to simply set up a new business in that field and start from scratch.
The specialist corporate lawyers at Bray & Bray have substantial expertise in reviewing and advising on franchise agreements as well as assisting clients in setting up their new businesses and associated agreements such as employment agreements, terms and conditions of business, partnership agreements and shareholders’ agreements.
Bray and Bray has three main offices in Leicestershire, contact us to discuss franchising options or feel free to pop in and see us at your local office by clicking on the links below;
Leicester call us on 0116 254 8871.
Hinckley call us on 01455 639 900.
Market Harborough call us on 01858 467 181.
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