Thinking of becoming a franchisee? Is it right for you?

Thinking of becoming a franchisee? Is it right for you?

Franchising is fundamentally different from setting up your own business from scratch. It involves a buyer (franchisee) purchasing the brand rights, know-how and start-up materials from the original business owner (franchisor). The franchisee then runs their own franchise business, often within a specific territory.

There are numerous factors to think about before entering a franchise. Below we set out some pros and cons of becoming a franchisee to help you decide if franchising is right for you.

Advantages for franchisees

  • Brand recognition: franchises are often well-known businesses with an established customer base saving you the time and resources needed to achieve this from scratch.
  • Lower business risk: The franchisor will have already proven their business and shown demand for their product or service, meaning a lower risk of failure.
  • Easier access to finance: Due to the lower business risk, the banks which operate in the franchise industry, will usually loan a higher percentage of start-up fees to a franchisee than a stand-alone business founder. Such banks include HSBC, NatWest, Lloyds and Barclays.
  • Ready-made customer base: The franchisor will have done much of the legwork to establish the brand through advertising etc. on a national level. Potential customers will be familiar with the brand and may be ready to purchase your product or service.
  • Greater support: Founding a business from scratch can be lonely. With franchising you have a network of other franchisees for support as well as expert advice from the franchisor.
  • Economies of scale: The franchisor can use the size of its network to negotiate bulk discounts, thus lowering the overall operations costs of the franchise. You may be able to benefit from servicing national accounts already established by the franchisor.
  • Best of both worlds: Franchising allows ambitious, independent-minded people to be their own boss without the risk of starting something from scratch. Although you do have to follow the tried and tested model. It also provides a ready-made network to provide advice and support when you need it.
  • Easier to sell your business: There is a market for selling existing franchise businesses so this will be to your advantage on exit; however, there will be restrictions on selling your franchise – for example, the franchisor needs to approve the person you wish to sell it to.

Disadvantages for franchisees

  • You won’t be entirely in control: Understandably, a franchisor will be very protective of their brand and will want to ensure it does not suffer any damage. Consequently, it will impose terms to ensure it maintains control over certain business decisions made by franchisees. Not only will you be bound by the terms of the franchise agreement, but you will also have to follow systems set out in the franchisor’s operations manual. These limitations may be extensive and feel frustrating.
  • High initial costs: If you are looking at a well-known and successful franchise, the price of buying may be high. The quid pro quo are the benefits, as listed above. But servicing and repaying the initial investment may be a big commitment.
  • Lack of financial privacy: The franchise agreement will stipulate that data about the business, especially financial data, must be regularly disclosed to the franchisor so that it can keep a check on how the franchisee is performing.
  • Rigid on-going costs: As well as the initial purchase price, there will be on-going costs to be paid to the franchisor. These will be set out in the franchise agreement and could include royalty fees, advertising costs and a charge for staff training costs. The franchisee may have to agree at the outset to purchase certain goods and services such as staff uniforms, raw materials and branded goods.
  • Potential for conflict: Given that most franchise agreements require a close, working relationship between franchisor and franchisee, there is potential for disagreements to arise. If there are good communications between the parties, costly legal action can usually be avoided. It is therefore important to do your due diligence before buying a franchise. Talk to other franchisees in the network to see if they are happy and get a feel for how the franchisor manages its commercial relationships with them. If they are happy that is a good thing, if not, it’s a red flag which may make you reconsider buying into the franchise.

Make sure you review your franchise agreement

The list of pros and cons set out above demonstrates the importance of scrutinising the terms of any franchise agreement extremely carefully.

Such terms will determine the extent of the franchisee’s obligations, how much freedom they will have in running their business and how they can cash-in their investment on exit.

It is therefore especially important to get your franchise agreement reviewed by a specialist franchise solicitor, to make sure it works for you.

How can we help you?

Goldstein Legal is part of nexa law. They are franchising solicitors who offer a range of legal services for franchisors and franchisees, regularly advising both businesses and individuals.

Contact any of our friendly team for a confidential, no obligation chat to find out how we can help you.

Roz Goldstein, Franchise Partner

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