Steps to follow
Do you want to run a business, but feel uncomfortable about the risks involved? Franchising may be the answer. It allows you to learn the ropes but minimise the risk and costs involved.
A franchise could take the form of a dealership where you sell the owner’s product but under a different name, for example, a car dealership. Alternatively, you could act as an agent for the franchisor. The most common form of franchise, however, is ‘business format franchising’ where the owner of a business grants a licence to you to use their business idea.
The advantage is that you already know the business idea is workable. You benefit from the goodwill associated with an existing brand name and the business acumen and back-up of the franchisor. The bulk-buying power of the franchisor, any training opportunities they offer and their marketing and design team will help you on your way.
The disadvantage is that you will have to pay a fee to the franchisor plus a percentage of sales revenue. You may be restricted to selling the franchisor’s product, plus whatever other restrictions exist in your contract.
Always seek legal advice before you sign anything. The British Franchise Association has a list of accredited solicitors who specialise in this area.
Check how long the franchise lasts, what options there are for renewing it and what geographical area it covers. Ask yourself: will this business work in this geographical area? What competition will I have? Is there a market?
What costs are involved? If the start-up fee is high, ask yourself whether the franchisor is truly confident about the business potential.
How much support will you be given? What help will you be given if you fail to reach expected profits? Assess the franchise as you would any potential business. Don’t assume the franchisor always knows best.
Know your exit before you enter. What will it cost you if you decide to give up the business? Are you tied in for a certain length of time? What if your relationship with the franchisor breaks down?
Check the codes of ethics of the British Franchise Association and the European Franchise Federation. These set out acceptable standards of practice. Does your franchise agreement measure up?
What to watch out for
The details of the contract are crucial. Seek independent legal advice before signing it. Make sure you are clear about the meaning of all the terms, particularly those affecting liability, finance and termination.
Solicitor’s top tip
The British Franchise Association runs a useful dispute resolution service. This is neutral and confidential. It offers mediation and arbitration services. Make use of this if your relationship with the franchisor runs into trouble.
Terminating franchise agreements
Buying or selling a business
Overview of commercial agreements