At first glance, franchising offers clear advantages: for those expanding their business, it can be a smart way to grow, while for potential franchisees, it seems like an accessible path to success, leveraging an established brand and reputation.
However, careful attention must be paid to the franchise agreement terms, and business owners should take critical steps before deciding to franchise.
How Does Franchising Work?
In a franchising arrangement, the business owner (franchisor) grants franchise rights to independent investors (franchisees). In return, franchisees pay an initial franchise fee to open additional outlets of the business. They operate under the franchisor’s trademarked model and brand, and they are also required to pay ongoing royalties.
Preparing to Franchise Your Business
Before looking for potential franchisees, it’s crucial for franchisors to ensure that all intellectual property is properly trademarked and protected. Additionally, evaluating the business model or even running a franchise pilot can help determine its viability and ease of adoption by franchisees. This preparation is vital, as prospective franchisees will want evidence of the model’s effectiveness.
Key Terms of a Franchise Agreement
The franchise agreement is fundamental to the franchise’s success. Therefore, it’s essential to engage a qualified solicitor to draft and negotiate the agreement. Here are some key considerations when preparing the franchise agreement:
- Duration – The agreement should specify the initial term of the franchise, along with any probationary period, renewal options, and associated costs.
- Training and Support -It’s important to clarify whether the franchisor will provide training or ongoing support, and to outline the specifics of that training in the agreement.
- Royalties – Royalty terms should align with what was promised by the franchisor. Typically, royalties range from four to ten percent. Key questions include whether royalties are calculated on profit or turnover, as this impacts the franchisee’s financial obligations, especially in times of loss.
- Exit Strategy – The agreement should detail the process for selling the franchise. It should clarify whether the franchisee must pay a percentage of the sale to the franchisor, whether the franchisor has the right of first refusal, or if the franchise can be sold at market value before the agreement expires.
- Post-Termination Provisions – Franchise agreements often include restrictive covenants like non-compete, non-solicitation, and non-dealing clauses to protect the franchisor’s interests. Franchisees must be vigilant in complying with these clauses to avoid legal complications.
- Area of Operation – Post-termination provisions should specify the duration and geographical area within which franchisees can open a similar business if the franchise ends. Franchisees need to ensure that these terms do not excessively limit their ability to operate.
Franchising can be a profitable and exciting opportunity for both franchisors and franchisees. However, it’s crucial that the franchise agreement is negotiated and drafted by solicitors with expertise in franchising to ensure fair value for both parties. Proper preparation and a clear understanding of the agreement can help set the stage for a successful franchising experience.
For more information or for expert advice on business or personal legal issues, contact us at info@carterbond.co.uk or email us at www.carterbond.co.uk or call us on 020 3475 6751.
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