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If scaling up is at the top of the 2023 business plan that you have laid out, franchising could be an option worth considering. While franchising may only be suitable for some businesses or industries, franchising can be an attractive opportunity for those that are well-suited to it.
In this article, we'll explore how to start a franchise business and the advantages of franchising as a growth strategy.
What is franchising?
Franchising is a business model where a business owner, known as the franchisor, grants the right to operate a business using their brand name, business systems, and processes to other companies, known as franchisees.
In exchange for this right, the franchisees pay a fee to the franchisor, typically an initial franchise fee and ongoing royalties based on sales.
The franchisor provides the franchisee with support and training, and the franchisee operates the business using the franchisor's established methods and systems.
This allows for the company's rapid expansion, as multiple franchisees can open locations in different regions or countries.
How does franchising help growth?
The critical aspect to understand about franchising relates to capital. Traditional methods of raising money for business growth are typically restricted to debt or equity, which are both fraught with inherent risks and limitations.
However, franchising funds grow in the form of the franchisees’ own capital investment. In other words, by franchising, you’re growing your brand and business by using other people’s money, but without incurring debt or giving away equity in your company.
Therefore, the funding aspect is very attractive to businesses wanting to scale at pace but in a relatively low-risk fashion.
Will I lose control of my brand?
To protect the franchisor’s brand integrity, the franchisees are usually strictly controlled as to what they can and cannot do by referencing the franchisor’s operating manual.
The franchisor then inspects and polices the franchisee against these standards.
What type of contract would I need?
If you’re considering franchising your business, you’ll need a Franchise Agreement to formalise the relationship between you as the franchisor and the franchisee.
The Franchise Agreement is a legal contract that outlines the terms and conditions of the franchise relationship, including the rights and obligations of both parties.
This document should be professionally drafted to protect your business interests adequately while being fair to the franchisee.
The Franchise Agreement should cover areas such as:
- The franchise fee
- Royalties
- Territory
- Training and support
- Length of the agreement
It’s essential to take the time to properly consider and negotiate the terms of the agreement, as it’ll be the foundation of the entire franchise system.
If the Franchise Agreement is well-drafted and comprehensive, it can be used as a template for future franchise agreements, with only minor modifications needed to reflect the specific details of each franchisee's arrangement. Our legal partner, LawBite, has a free Franchise Agreement template you can use to get started.
How to resolve franchisee conflicts and promote unity and collaboration?
A key aspect of franchising is that in most Franchises Agreements, each franchisee is granted their own territory, which is the site or area in which they’re permitted to trade. This prevents conflicts between franchisees competing for the same customers in the same area.
It also allows the franchisor to neatly divide up the country into separate territories and then market each franchise territory for sale separately.
How do the payments work?
There are various fees involved:
- The franchise fee is the upfront payment made by the franchisee to the franchisor to obtain the right to use the franchisor's brand name, systems, and processes.
The amount of the franchise fee is typically based on market forces, such as what other franchises in the same industry are charging, as well as the strength and value of the franchisor's brand.
The franchise fee is usually a one-time payment made at the beginning of the franchise agreement. However, some franchisors may allow payment plans or financing options to make it more affordable for the franchisee.
- The royalty payment is typically a percentage of the franchisee’s sales. This could be a flat percentage or a tiered structure to encourage strong sales.
- Marketing and administration fees are also common payments.
These are usually fixed payments chargeable to the franchisee every month.
The idea with these payments is that they contribute towards the ongoing running of the entire franchise operation and the overall marketing budget.
Do I need to prove the business formula first?
It certainly assists in selling franchise opportunities if the would-be franchisees can see the brand in operation, successfully making sales and producing profitable returns.
Understandably, franchisees will want to know that the franchise presents a viable and profitable opportunity before they invest their hard-earned money into the business.
Wrapping up
In conclusion, franchising can be an excellent way to expand your business rapidly. Still, it's crucial to approach it with a clear strategy and an understanding of the legal considerations involved.
Seeking legal support from a reputable firm like our legal and advice partners LawBite can help ensure that you have all the necessary documentation in place. With the right approach and support, franchising can offer a cost-effective and low-risk way to grow your business and reach new markets.
So, if you're considering franchising as a way to scale your business, be sure to consult with legal experts. Of course, there are other ways to scale up, so take a look at our guide on choosing when and how to get help to grow your business for some alternative approaches. There are also lots more helpful takes on this topic included in our selection of business guides, so take a look and get ambitious!
About the author
Ashley Gurr is a commercial and contract lawyer at LawBite. Ashley has over 15 years of experience in private practice helping SMEs and in-house for an international consultancy group advising on Commercial Contracts and multinational utility giant in a Contract Strategy role.
