When rolling out a franchise business either as a Master Franchise or a Franchisor one of the most difficult things to navigate can be the allure of a keen franchisee versus the reality of whether they actually have the funding and business savvy to make it work.
Also, as important, will that franchisee buy into the ethos of your brand and honestly assess themselves as to whether they have the right skill sets and attitudes to successfully promote the business in keeping with the vision that you have set out to achieve.
How can you protect yourself?
It is very tempting when the pressure is on to accept franchisees who offer the money, but may not be quite the right fit.
A well drafted franchise agreement will go some way to protect you and give you a get out if things don’t proceed well. However, the success of a franchisee is so closely tied to the success of that franchise business especially when there are management fees or other sums payable to you, so due diligence on the franchise is key to success.
There are also hidden costs to consider!!!
- The expense of reputation for example. If a business is forced to close because of mismanagement, this can wreck havoc and cause irreparable damage to your brand.
- This may also result in loss of opportunities, perhaps investors will be less willing to take a chance on your franchise or banks more reluctant to give loans to budding franchisees.
- In the event of a dispute (as bad publicity can be fatal to a franchisor) it is sometimes better to reach a settlement rather than to risk bad press. This can mean that you will be forced to spend time and money on professional fees.
As a franchisor you are relying on your franchisees to be your best form of advertising, therefore whilst chance and good fortune can play a part in choosing franchisees who will grow your franchise, there are some steps that you can take to minimise these risks:
- Ensure that any people with whom you engage in discussions sign a non-disclosure agreement so as to protect your promotional and advertising materials, financial information and operation and business manuals. The whole point of purchasing a franchise is to buy into a business model with a track record. You would do well therefore to keep your trade secrets secret, so that your hard work and money invested in producing such information and development of the franchise is not wasted;
- Insist on a deposit during initial negotiations this can be an effective method of separating the wheat from the chaff, in other words the franchisees who are genuinely committed to your brand and moving forward to sign a franchise agreement. Some people may be fishing for information, some may be in talks with us and wasting your time so be savvy;
- Running a business is not for everyone. Without careful thought and planning, spending can spiral out of control. It is worth providing franchisees with literature and ‘how to’ guides to help them understand the costs involved in setting up the franchise, keeping cash flow statements and insisting on credit controls. You should assure yourself that they have sufficient funds to launch and enough working capital to see them through at least the first 3-6 months in business, especially if your franchise involves leasing business premises and taking on employees;
- Personal guarantees can be used to protect sums owed to the Franchisor, especially if the franchise is purchased as a limited company. This means that in the event of a default by a franchisee, a franchisor can demand payment from the guarantor in his or her personal capacity;
- If your franchise involves a regulated industry, discuss any additional considerations with your franchisee and ensure if your franchisee is simply looking to invest, it has enough money to pay staff to run the operation, such as insurances and regulatory fees. It might also be necessary to obtain a decision in principal that they will be insured before you proceed;
- Whilst a lot can be said for drive and determination alone, previous experience and transferable skills can be a good indicator of suitability to operating a particular franchise. If appropriate ask to see a C.V or take up references;
- Don’t be afraid of running an interview process when selling franchises to try and establish whether an interested party will bring the right attitude and success to the network of franchisees;
- Make sure you have a good accountant and lawyer on hand to carry out due diligence, draft tight agreements, review lease or IP assignments and where appropriate provide the franchise with a staff handbook, terms and conditions for clients as standard or guidance notes.
Our litigation department has sadly been involved in many scenarios where this relationship has broken down for UK and cross border franchisors. It is at this stage that the documents are truly tested on dispute resolution methods, jurisdiction, valuing the business, IP protection and restrictive covenants protecting franchisees from closing your brand and setting up again in direct competition.
A recent case led us to issuing an injunction and hiring an overseas lawyer – at great cost to the client. Poor documents, ignoring the signs or not carrying out true checks can seriously come back and bite you.
Here at a City Law Firm we are able to draft the full spectrum of documents required to protect your legal position as franchisor and offer advice and assistance at any point in the process of rolling out a franchise in the UK territory. We can help with IP or Lease assignments; due diligence; staff handbooks and credit checks. Please contact us for a complimentary brainstorm session for ways in which we can help.