What are the advantages in franchising your business?
The following list sets out some of the advantages which may apply if you franchise your business:
- Minimal capital expenditure once the system is up and running – because franchisees use their own capital to develop a franchise business there is greater opportunity for growth with minimal capital expenditure. Due to the lower capital expenditure there is potential for a greater return on investment;
- You no longer need to be focused on running the business – your focus will be on franchisee performance not day to day operations;
- Franchisees as business owners can often be more motivated than employees to make a success out of the operation;
- Liability for employees and contractors under legislation such as the Health and Safety in Employment Act 1992 is with the franchisee and not you;
- By using a franchisee’s time and effort there is potential for the franchise network to grow faster than by supervising employees and achieve greater market penetration and increased market share;
- More funds are available for advertising as a result of pooling the marketing and advertising fees received from franchisees;
- More opportunity to negotiate group buying discounts due to additional purchasing power;
- More opportunity for research and development as a result of feedback and reports received from franchisees. Receipt of a steady cash flow from royalties received from franchisees;
- As franchisor you will retain a good level of control over your franchisees as a result of contractual arrangements;
- You will be subject to limited contingent liability due to the fact that in most cases you will not be contracting directly with third party suppliers and landlords;
- Franchised businesses usually perform better than company owned outlets;
- Potential for a smoother entry into foreign markets as a result of contracting with franchisees located in those markets;
- You still retain ownership of your brand and can continue to develop the system;
- You can run company owned operations alongside franchised operations.
What are the disadvantages of franchising your business?
As with any business strategy franchising your business can have disadvantages and these can include:
- Not all businesses are suitable for franchising and not all business owners have what it takes to be a franchisor.
- Franchising a business is not a get rich quick scheme – a significant amount of upfront costs and your time is required to develop a franchise system and even when the first few franchises are sold sales can by quite low and a lot of “hand holding” is probably going to be required – it can be some time before you start to receive fees and a regular income.
- You will only receive a portion of the profit made by the franchisees (by way of a royalty).
- Dealing with problem franchisees – franchisees cannot be fired and it can take quite a bit of expense and effort to deal with a non-performing franchisee. It is expensive and not always that easy to enforce the terms of a franchise agreement.
- A successful franchisee may try to control the direction of the business – can end up with a “tail wagging the dog” scenario if the franchisor is not alert to this possibility and takes preventative steps e.g. having a franchise advisory council.
- Franchisees will develop an in depth knowledge of your business system and there is potential for this knowledge to be used after they have left the franchise system notwithstanding the non-competition restrictions in the franchise agreement.
- Franchisees cannot be treated like employees – they are business owners in their own right and a different approach is required.
How do I know if my business can be franchised or not?
Not all businesses can be successfully franchised. Characteristics of a business that may be suitable to be franchised include businesses which:
- Are currently successfully operating and have created a demand for the products and services it offers
- Have a brand which is well known in the market in which it operates
- Have developed a systematic method of doing business which can be easily documented and duplicated
- Have owners who understand what it takes to be a franchisor and have what it takes
- Have the ability to fund the costs involved in franchising (refer How much will it cost to franchise my business? Below). Franchising a business is not cheap.
Fortune Manning recommends that you engage the services of an experienced and reputable franchise consultant who you can meet with and discuss your options. They will also be able to analyse your business and conduct a feasibility study which will give you a good idea as to whether or not your business is “franchisable”.
How do I franchise my business?
After you have determined whether or not your business can be franchised there are number of further steps which must be taken, namely:
- Strategic Planning – deciding which form your franchise system will take. There are number of different forms and it is crucial that you select the right form for your business – your franchise consultant will be able to assist you in making this decision.
- Systems – You will need to develop and completely document your franchise system. This will include developing a marketing plan, training programmes, franchisee selection and recruitment programs.
- Third Parties – you will need to develop relationships with third parties who will be assisting both you and your franchisees – for instance negotiating preferential supplier arrangements.
- Legal – you will need to engage the services of a franchise lawyer to assist you in documenting your relationship with your franchisees in your franchise agreement. Each franchise system is different and this is why it is important to use a franchise lawyer who will be able to draft a franchise agreement which has been tailored to meet the needs of your franchise system. There are other documents which your franchise lawyer will be able to help you with; disclosure document, confidentiality agreement, application forms, terms of trade etc. Contact the Franchising Team at Fortune Manning for more information.
- Intellectual Property – your franchisees will want to know that your brand has been protected as much as possible. You should talk to your lawyer about how you go about protecting your intellectual property.
- You – you should find out exactly what it takes to be a good franchisor. Operating a franchise system and working with franchisees is completely different to being an employer. Talk to other franchisors and your franchise consultant. Get as many tips as you can.
Fortune Manning recommends using the services of an experienced and reputable franchisor consultant to assist you in franchising your business.
Do I need to use a Franchise consultant?
No, but our experience has shown that those franchisors who have engaged the services of a franchise consultant have a much smoother and efficient entry into the franchise market. A good franchise consultant will have vast experience in assisting in the franchising of a number of business and will be able to assist you to franchise your business much more efficiently then you would be able to yourself. The money you spend on a franchise consultant will pay dividends when you are able to enter the franchise market in a quicker time frame with a franchise system which has been designed and implemented correctly. We have found that franchisors who have not used a franchise consultant will take longer to enter the franchise market and will often need to change their system several times before they get it right. This will not be the case if you engage the services of a reputable and experienced franchise consultant.
How much does it cost to franchise my business?
Creating a sustainable franchise system is not cheap. To do it right you will be engaging the services of a franchise consultant, a franchise lawyer and an accountant to assist you to franchise your business. Depending on the type of system you could be looking at upfront costs over $100,000. Yes this is expensive but by engaging the services of professionals you will be doing your best to ensure that your franchise system will be successful. You bank may even be able to fund some or all of these costs.
Should I trade mark my brand?
The advantage that a registered trademark has over an unregistered trademark is that you obtain automatic protection under the Trade Marks Act 2002 and in the event of unauthorised use of your registered trade mark you will only need to provide evidence of your registration.
If your mark is not registered than you are left with taking an action for passing off under the common law or an action under the section 9 of the Fair Trading Act 1986 for misleading and deceptive conduct. To be successful in such actions you will need to prove that you have goodwill in the mark – not an easy task.
By having registered trademarks you are also adding value to your franchise system and such trademarks are easily transferrable in the event of sale.
Applying to register a trade mark is not a simple process. Firstly, you will need to conduct name availability searches (especially in the case of a new mark) to confirm that you are not breaching someone else’s intellectual property rights. It can be an expensive process if you have developed a mark and produced advertising material etc only to have a third party threaten you with taking action under the Fair Trading Act 1986 for misleading and deceptive conduct. Secondly, you will need to search the Trade Marks Register of the Intellectual Property of New Zealand to establish that there are no similar marks. Even if there are similar marks registered there can still be ways of obtaining registration and Fortune Manning can assist with this. Thirdly, you will need to establish which class you should register your trade mark in and the goods and services which will apply to that registration. This can be a complex task and Fortune Manning has the expertise to assist you with this decision.
Why does it cost so much to draft a franchise agreement – surely you have precedents you can use?
Unfortunately there is no one size fits all franchise agreement which can be used for all franchise systems. There are certainly elements which you may see repeated in the agreements for different franchise systems, however, every single franchise system is different – different fee structures, different obligations on both the franchisor and the franchisee, different termination events etc. It is essential that the franchise agreement reflects the realities of each particular franchise.
At Fortune Manning we have developed fixed price packages for the drafting of franchise agreements and related documents. Please contact us to find out more details.
Why shouldn’t I agree to amend a franchise agreement just for a particular franchisee?
Of course it will always ultimately be your decision as to whether or not you will amend your standard agreement to suit a particular franchisee and this may be required in certain situations: for instance when you are in selling your first few franchises. As time goes on however this should become less and less necessary.
The problem with amending your franchise agreement on a case by case basis is twofold – firstly you could end up creating a precedent and other franchisees once they become aware of the changes will expect you to agree to similar changes in their agreement. Secondly – this becomes hard to manage from an administrative perspective, trying to keep up with the changes as time goes on.
What is a FAC and do I need one?
An FAC is a Franchise Advisory Council which is usually a group made up of both franchisee representatives and franchisor representatives. It can be used as a forum for franchisees to put forward any concerns that they may have to the franchisor and for the franchisor to get feedback and consult with regarding to any developments. Without a FAC franchisees will often band together against the franchisor which can lead to resentment between both the franchisor and the franchisee. By having a FAC the franchisees’ concerns are dealt with in a more disciplined way and both parties have a forum in which they can address any issues at an early stage and hopefully before any resentment builds. A FAC is generally used when a franchise system has been around for a while purely due to the numbers of franchisees.
If you do decide you want to establish a Franchise Advisory Council then there are a number of decisions you will need to make; e.g. the number of representatives from both the franchisee and the franchisor, the rules that will apply and who will pay for the costs of the council.
At Fortune Manning we can assist you with assisting you to make decisions about your FAC and draft up the rules.
The answers to these do not constitute legal advice. If you are considering franchising your business we strongly recommend you obtain legal advice from a lawyer who specialises in franchising. Contact the franchising team at Fortune Manning for more information.