Franchising is on the rise. It's certainly bigger now than it was 20 years ago. According to a NatWest survey of the British Franchise Association, it increased 46% during the decade up to 2016.If your business is moderately successful and you're ready to expand your reach, franchising could be an attractive option.If I set up Marie's Burger Bars (unlikely!), I'd probably be able to run the first two or three outlets myself. Once they were successful, I'd open other outlets to be run by franchisees. They would have to look like part of my operation, and any differences would be indistinguishable to customers.Before you decide whether franchising is right for you, there are a number of issues to consider.Benefits of franchisingFranchising allows you to grow more quickly than organically opening a series of new branches. And it requires less capital than fully funding multiple branches with the associated cost of property and staff.But there are risks, because franchising means you lose an element of control over how your brand and product are sold and developed. The level of support you need to provide to your franchisees rises according to the extent of control you exert to maintain your brand integrity.Franchise agreement v distribution agreementIt's important to understand the difference between a franchise agreement and a distribution agreement.Any franchisees you take on will look to the outside world as though they are part of your business, using your brand, and selling your products and services. With a franchise agreement, you might control where your franchisees buy the goods, but it's unlikely that you will produce everything they sell. You need to ensure they buy appropriate goods, so that the standards you require are maintained.This is different from a distribution agreement, where distributors buy your goods from the manufacturer and sell them to customers under their own brand.For example, there are different models for franchising a chain of burger restaurants. One might insist that the burgers and buns are purchased from the franchisor, while another might set quality controls but not care where the burgers and buns were obtained.ExclusivityA franchisee who takes on your brand will work exclusively with you. On the other hand, if it's a distribution agreement, they may work with many other manufacturers as well.For example, Argos is a distributor, selling goods from lots of suppliers under their own brand.Making franchising workBrand ownershipWhen starting a new business, you need to make sure you own a distinct brand. A lot of businesses fail to have clarity over this, but it's an important step to ensure that ownership of the brand is never in dispute.If your brand is worth protecting, it's worth protecting beyond the logo. You want to protect the quality of your presentation in every outlet, worldwide.Proven business modelYou might be worried about sharing your business idea in case it's copied, meaning that you're tempted to go straight to franchising from launch. But your business model needs to be tried, tested and proven before franchising. An unproven idea is harder to sell to franchisees, and harder to make work. If you don't have a highly developed and refined rule book to give your franchisees to live by, your brand will quickly be diminished by them doing inconsistent and eccentric things, such as:• Sloppy uniforms• Bad signage• Poor customer service• Low-quality product All this will rebound on your brand. Without operational testing, you'll soon develop a bad reputation and your business will be doomed to fail.Potential and risksYou should have a formal franchise agreement including strict requirements for your franchisees to abide by, such as not sharing your knowledge and expertise. If you haven't developed your business model sufficiently, you won't be ready to create such an agreement.As lawyers, we can guide you through the issues and create a framework agreement. But we won't know how your burgers need to be flipped, or how you want your fashion items to be presented. It's really important for you to be ready with that level of detail.ComplianceThere are certain regulations that apply to franchisee networks, including:• Until 2019, you are responsible for the electricity consumption of your outlets under the CRC Energy Scheme• You are responsible for your franchisees under UK legislation, including:o Bribery Act 2010o Modern Slavery legislation o Data Protection (including GDPR)• Money laundering regulations between yourself and your franchisees (this is particularly applicable in some service sectors)• The Competition Act 1998 could leave you open to challenge by the authorities. Do a 'health check' to ensure your franchise model excludes price fixing or other anti-competitive behaviour, because this could undermine your business entirelyWhat this means to youAs you can tell, there is a lot to think about. But don't panic! We can help you through. We'll help protect your brand, and then develop your franchise model and agreement when you're ready.
