Becoming a franchisee
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Written on 08 July 2014
To run a small business and most of all, to keep it going, is
a challenge which should not be underestimated. It takes hard work and
a long time to get a business up to speed and start making profit and
there is no certainty that the business will succeed.
A franchise is considered to be a more secure way of starting
a business. A good franchise opportunity offers a proven business
format with an initial and continuing support framework which helps
build both capital and earnings. The owner of a business, the
franchisor, will grant a franchise licence to a local operator, the
franchisee, which will entitle the latter to trade the business under
the franchisorís brand and to use the franchisorís already developed
and proven business system.
Profits are not guaranteed but the business is more likely to
succeed as it has already been tested and approved. Moreover,
franchisees will benefit from national advertising campaigns and from
customersí reliance on the brand name.
To start a franchise, one needs to pay an initial fee to the
franchisor which should cover the cost of establishing the franchisee
in business with a small element of profit to the franchisor. The
franchisee must therefore consider the need for a bank loan to start
the franchise. The franchisee must also ensure that the business has
the potential to be profitable by consulting previous trading figures
and checking their veracity. During the franchise licence period, the
franchisee will need to pay continuing fees for ongoing support. Those
fees can be based notably on a flat rate or on a percentage of the
turnover. They will be payable monthly in most cases to facilitate
control on sums. A marketing contribution which will usually be a
percentage of the turnover may also be charged by the franchisor.
Usually franchise agreements are for long initial periods so
that the franchisee is able to recover his initial investment and start
to make a profit.
The franchise agreement details the way in which the business
should be run by the franchisee and includes confidentiality
obligations, accounting and reporting requirements, control on staffing
levels and insurance. Under EU competition law the franchisor cannot
oblige his franchisee to sell any product or service at a particular
price, although he can make recommendations under relevant provisions.
The agreement should consider whether the franchisee should be obliged
to purchase all ongoing consumables exclusively from the franchisor.
When there is an exclusive purchase obligation then the term should not
be longer than 5 years to avoid a potential breach of the relevant
The franchisor, for his part, must provide support, advice and
training for the franchisee and his employees. He must use the ongoing
fees for advertising, product development, and promotional activities.
The agreement should contain non-compete provisions to prevent
former or current franchisees from competing with the franchisor or
other franchisees. Agreements can also include a right of renewal
generally conditional upon the franchiseeís compliance with the
contract, the completion of refresher training and the agreement of
Franchisees should have a right to sell their business subject
to the franchisorís prior consent and generally conditional on the
franchisee being in full compliance with his obligations and paying for
the franchisorís expenses and costs of training the purchaser. Most
agreements allow the franchisor to have a right of first refusal to buy
back the business on the same terms and price offered by the purchaser.
Most termination clauses in franchise agreements are
one-sided: they allow the franchisor to terminate for the franchiseeís
breach. It is a guarantee for the franchisor that the franchisee will
not terminate the contract and set up a new business in competition
with him thanks to the training and know-how the franchisee has
acquired. But the franchisee can terminate the contract if the
franchisor fundamentally breaches the franchise agreement.
In conclusion, franchising enables people to own their
business and to be responsible for it; however, the franchisor retains
control over the way in which products and services are marketed and
sold and controls the quality and standards of the business.
Franchisees are therefore not left with much liberty to run their
business and should not expect to implement their own original ideas
without approval from the franchisor.
Written by Written by Marion
Hubier, an under-graduate student of Law
About the Author
Solicitors offer services and advice for litigation,
commercial contracts, Intellectual Property and IT legal agreements. We
are experts in commercial law with a heavy emphasis on Intellectual
Property, Internet and e-commerce law. Lawdit is a member of the
International Trademark Association, the Solicitors' Association of
Higher Court Advocates and we are the appointed Solicitors to the
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Article Published/Sorted/Amended on Scopulus 2014-08-11 10:48:39 in Business Articles