Business Law: Franchising is not always the right solution, warns Max Harnden
FRANCHISING a business can be a quick way of expanding distribution but there are also potential downsides for franchisors.
A franchise is a way of doing business where, in return for a fee, a franchisor (the franchise owner or promoter) allows a franchisee to sell its products or services and adopt its trading style. The key elements of a franchise are:
: :The franchisee is allowed to use a name or brand which is associated with the franchisor;
: : The franchisor continues to exercise control over the franchisee in order to protect the brand image and value; and
: : The franchisor provides assistance to the franchisee (for example, advice on finding and acquiring premises).
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Franchising can provide a business with the opportunity to secure distribution for its products or services more quickly than if it had to train up its own employees and develop its own internal marketing, sales and distribution organisation.
Using a franchisee’s money will enable the franchisor’s business to expand more quickly than if it had to find the funds itself. It may help to make the business’s budget go further by providing the franchisor with increased purchasing power and possibly reduced overheads, increasing its profitability.
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Many businesses involved in the supply of goods or services motivate their employees by linking their remuneration to sales. Franchising takes this one step further by linking the franchisee’s financial well-being to the success of the franchisor’s business.
However, franchising is not the right solution for every business, and the disadvantages need to be carefully weighed against the attractions. These include:
: : Loss of control. While a franchise agreement will impose substantial restrictions on the franchisees, it is important to remember that they will be independent third parties who will be seeking to maximise their own profits, sometimes at the expense of the franchisor;
: : Part of the franchisor’s profits will be used to support the franchisee’s business;
: : By involving a third party, the franchisor will have to divulge substantial know-how and information concerning its business. Although a franchise agreement will contain restrictions on the franchisees’ ability to make use of this information for their own purposes, these types of provisions are often difficult to monitor and enforce;
: : The business skills required to control franchisees and provide back-up are different from those involved in operating a business with its own employees: and
: : A franchisor may owe a duty of care to its franchisees and prospective franchisees. The High Court has held that a franchisor must ensure that when they provide advice to a prospective franchisee, they must do so with due skill and care.
Careful thought from a legal and commercial prospective is required before deciding on a franchise arrangement. Please contact Max Harnden for advice – firstname.lastname@example.org .
: : Max Harnden is a partner and business law specialist at Gotelee Solicitors.