So, what is meant by ‘franchising’ your business? If you are franchising, you are agreeing that a local entity can operate a branded version of your business strictly in accordance with the style and manner set out in the franchise agreement.
A franchise agreement is a common route to achieve a rapid expansion overseas – McDonalds, Subway, KFC, Kwik Fit, Hertz Car Rentals and Hilton Hotels are among many brands that operate franchise businesses.
Franchise agreements give you a lots of controls over the way your business partner operates locally, but they only work where you have established brand and business model and a way of running your business that you can franchise.
You grant a package of rights to your franchisee, including to:
You may or may not grant rights to the franchisee exclusively (oh that certain fast-food restaurants confined themselves to one branch per territory).
You must supply to franchisees all the materials that they need to run the business locally: for example;
The franchisee must operate the business strictly in accordance with the agreement, using only approved marketing and advertising materials, approved products and approved packaging and stationery.
The franchise may operate from approved premises (think of a particular pub), in which case the franchisee must take care of all tenant obligations, keep the place clean, fix all approved signage and operate agreed opening hours.
The franchisee must use its best efforts to promote the business (for example, applying an agreed percentage of its receipts on advertising and marketing). The franchisee must also run the business responsibly (for example, paying all debts and making sure that its contractors comply with the franchise agreement).
Rewards are a matter of negotiation, but commonly the franchisee pays you an initial fee as an entry payment to become a member of your franchise. After that you receive monthly payments of a percentage of gross receipts from the franchise operation (allowing for the franchisee to cover its costs of overhead, marketing and so on and still make a profit for itself). Or perhaps the franchisee keeps the local gross receipts after paying you a management fee every month. Sometimes the franchisee has to meet certain minimum monthly revenue targets, so that you know that the business is going to grow.
If the franchisee is small, you can require a personal guarantee to back up these payment obligations.
You don’t want the franchisee competing with you during or after the term, and so include restrictions on this activity. To avoid the franchisee poaching your customers or employees post-term, include restrictions on this for a limited period (say one year post-term).
The franchisee must operate in accordance with a strict confidentiality clause. This is important when two people know each other’s secrets – or, as they put it in Thailand, when ‘the hen sees the snake’s feet and the snake sees the hen’s boobs’. Hmm… a bit unseemly. The franchisee must keep accounting records to allow you to audit them, and no doubt you want to include strict termination rights if the franchisee breaches its obligations.
So there you have it. Whether or not you decide to franchise your business you can now go in with your eyes wide open. For more information on your options, you can request to speak to me directly via our business legal advice page or I have written a book in the Wiley Dummies series you can access for a discounted rate on our website.
Clive Rich, corporate and commercial lawyer and founder of LawBite