What is Franchising and how does it work?

Here, Director of the Commercial team’s Franchising hub within Beyond Law Group’s Specialist practice, Beyond Corporate Law, Natalia Shvarts, explains some of the key areas of franchising and busts some myths about how it all works.

Whilst franchising is not for everyone, it certainly has many advantages and when done well, it can be extremely lucrative for all involved – think McDonalds, KFC, Starbucks, or Costa. All successful and growing brands. In this series, we aim to explain some of the key areas of franchising and bust some myths, hopefully giving you a little extra knowledge to help you decide whether it’s right for you or your business.

For a franchisor or a prospective franchisor, franchising is an opportunity to expand without being the sole investor of both money and effort. For a franchisee or a prospective franchisee, it is an opportunity to be a business owner but instead of starting from scratch, having tools, guidance and support as well as taking advantage of an already existing brand. Let’s look at these in turn.

We have already said that franchising is a method of expanding a business. Whether franchising is right for you as a vehicle for expansion will depend on whether or not your business is franchisable (and we will pick up that point in our next week’s blog) so for now, let’s presume that it is.

Franchising is where one party – a franchisor – grants another party – the franchisee – a licence for a specified period of time to operate a business that the franchisor has established using the name and brand of the franchisor subject to the franchisor’s quality control measures in return for a fee.

Franchising is often described as a cheaper, more efficient way to expand your business and whilst this may be the case, this does not mean that you do not need to invest in order to have a successful franchise network. There is a significant initial investment which will be required which will include:

Protecting your intellectual property rights. At the heart of franchising is a brand. A prospective franchisor will need to ensure that they have taken appropriate advice and have taken all relevant steps to protect their intellectual property rights, such as obtaining a registered trademark for example. It is essential to undertake proper research, because the last thing you want to do is to have to rebrand after you have signed your first few franchisees and spent money on branded materials, or worse, fitting out premises and branded clothing because someone else already has rights to the same or very similar name. Also trade mark protection is limited in geographic scope so if expanding overseas you will need to ensure that your trade mark is registered in your target country and if, relevant, the translation works in the local language.

Pulling together a manual. This is the core element of the franchise business and is essentially a step by step guide which somebody who has never worked within your business can follow and replicate what you do. Getting the operations manual right is very important and should be done properly.

Creating a training programme. An operations manual alone will not be enough and, as a minimum, most franchisors have some sort of initial training programme as well as additional training which will be delivered throughout the life of a franchise.

Ongoing support. Your franchisees will expect a level of ongoing support and as a franchisor you need to be in a position to meet this expectation. Although it is for the franchisor to set the expectation in the first place, you then need to have the infrastructure to deliver on it.

Quality Control Standards. The biggest difference between licensing and franchising is that in franchising franchisees are subject to quality control measures. This means that the franchisor must be clear on what these are, how franchisees will be assessed and then actually enforce system standards.

Franchise Agreement. You will need to have a good franchise agreement in place. A franchise agreement is the main contractual document between you and your franchisees. It must be tailored to you and your business and it must clearly set out your rights and obligations and the franchisee’s rights and obligations. This is essential for the protection of your brand, the manual and the wide business.

Whilst all of the above will be provided in return for a fee (both an initial fee at the outset as well as an ongoing fee), it takes time, effort and money to become a franchisor.

Franchising is also very much about building relationships and any franchisor’s success will be largely down to choosing the right people as your franchisees. This is even more important in the early days. So, consider what type of person you are looking for to operate a business like yours. It is not always about having specific knowledge, but it may be about possessing certain skills or attributes. Are you looking for someone who will need to be out and about or is this the kind of business that can be operated from home or around other commitments?

For a prospective franchisee, investing in a franchise means that you are buying into an existing brand. You are buying into a business which has been proven to be successful and you get trained on how to operate it. You have access to support, to the wealth of experience of the franchisor and perhaps other franchisees within the network. This does come at a price – both financial as well as in terms of restrictions on how you must operate. We will explore the differences between investing in a franchise and going independent in more detail later in the series.