Buying a franchise

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Buying a franchise

This article is useful to anyone contemplating buying a franchise. It provides basic information on:

  • The set up process;
  • Products that are known to work;
  • Sales & marketing;
  • The outlet and it’s position;
  • Finance;
  • Training;
  • Back-up support.

Introduction

So you’ve decided you want to have your own business? Choosing a franchise you’re your own entrepreneurial and original idea cuts your risks when deciding to run your own business because you are starting a business that already has a proven business enterprise and name.

When you buy a franchise it is usual that you will provided with absolutely everything required to keep the business running successfully.  This will include training, customer leads, research information, equipment, suppliers and marketing tools and often products.  Effectively, a franchise is a license to use the business name and any other patents, brandings and trademarks that the business has used. 

Owning a franchise means you (the brand) will be chosen over similar products of the same quality. This is simply why people have a brand name.  Behind the consumer psychology of it all, people will go for a brand that they know and trust when in doubt over choosing between a range of similar products.

How and why does it work?

A successful business (whether that is an Italian coffee shop, a new booster lingerie concept, an energy saving device or a business providing something else) decides they have the type of product and / or service that is in a fairly niche market. They know that their business would be of interest to others who have less experience or fewer ideas to set up their own business, or those who simply believe that a business selling a proven product is a sensible option. 

The benefit to the franchisor is capital: not having to obtain finance and then use it to fund the growth of your business is a major benefit, alongside gaining quality entrepreneurs to join in the brand building and market share grab.

Here the process in brief:

  • A franchisor advertises the service or product;
  • You (the franchisee) request a franchise information pack;
  • You complete an application;
  • The franchisor accepts your application, or with major franchises, you have a meeting;
  • You sign a contract;
  • You pay the initial fee;
  • You receive training, resources (supplies, starter pack) and marketing help and/or advice;
  • You start to trade;
  • You continue to buy supplies from the franchisor (possibly at a minimum figure each week/month);
  • You usually pay a weekly/monthly/yearly service fee.

Products that work

A proven product should be shown to have succeeded in more than one location, and also to have been shown to be capable of success in a fairly short time. A well-known brand name is not essential as long as the business is known to be in demand: the franchisor should have market research that shows little risk in the venture given an average area.

The Pros and Cons

Pros:

  • Proven brand and product;
  • You own your own business and are your own boss;
  • Product and management support;
  • purchasing power;
  • Marketing power.

Cons

You:

  • Answer to someone;
  • Must use franchise supplies;
  • Pay on-going fees;
  • Compete locally;
  • Obtain poor and costly service backup;
  • Renew the contract every 1, 3, 5, 20 years?

The 'pros and cons' are subjective as a franchise is a franchise: you enter into an agreement and you know the rules, and those rules are unlikely to suit you 100%. If you are an 'entrepreneur' you may never be able to settle into a role where you have a boss: likewise, if you are a competent manager you may relish in the opportunity of 'running' your own business with a large support system behind you. 

Marketing

Marketing is crucial. To maintain a product as a market leader the franchisor may charge an additional levy for marketing purposes. This might be included in the original and/or service fee.

A realistic expectation for the average franchise is to see your product in the relevant marketing arena: TV, monthly glossy, national and/or local press, radio etc. Of course, local marketing is usually one of your expenses.

Marketing and advertising costs

Although the franchisor may have agreed to provide some input to marketing and advertising costs, you will still be required to contribute the majority from the franchise earnings.  The franchise should produce a report of how the costs of marketing and advertising is split and details of how the franchise will benefit from this. If there are other franchisees (in different areas), it should say how the marketing and advertising costs will be shared between you and the conditions for doing so: it may be that your particular business benefits more from a form of advertising then others.

A franchiser that advertises nationally will give you the benefits of being a recognized brand, and should more than compensate the cost to you of such marketing by improving sales.

Sales Territory

The franchisor will have a plan that shows the maximum franchises an area will have: numbers will reflect the number of businesses and/or homes in any given area. You may also be 'allowed' to go onto an area that has not been taken yet, but on the understanding that you must leave this extra territory when a new franchisee appears.

It is also possible for an area to grow beyond the ability of one franchisee: in such a case the contract might demand that you give up one part, or demand that you achieve suitable growth to fulfil potential.

Premises

You must be fully committed to the business before buying or leasing an operating space.

Finance

A number of franchise products are advertised with 'finance available'. You may be able to get a better deal from other sources. There could be some pressure to use a certain financier. If you want to start a business using a recognized franchise and you have an average credit rating you have no need of expensive credit.

One area to concentrate on is a deposit towards the initial fee: the higher the deposit, the less you will be paying in interest from your revenue at a time when you need all the cash working for you in marketing, stocks and a living wage.

Training and backup

Some level of training is usually provided. A quality franchisor wants you to be successful. With top franchises you will spend time at a residential course, provided with induction manuals and taken into an existing franchise site where you can look and / or work: with the bottom of the franchise industry posting you 10 pages of poorly copied instructions may be your lot. Training is not just about the product, areas such as accounts, vat, tax, paye, stock control, marketing and advertising and employment law!

Is it my business?

You are always under some degree of control and this could mean growth, sales targets, opening days and, of course, an on-going fee. Technically no, but it’s not all bad – you do benefit in many ways previously discussed.

What if I want to quit?

The contract should allow an assignment to a new franchisee. Ensure the transfer fees for doing this (if any) are low. The franchisor should not be allowed to refuse a fair and suitable applicant. The franchisor may have first refusal, and you may want an arbitration clause in the contract if you cannot agree on valuation.

Launch

The franchisor should have a planned launch campaign that has been used in similar circumstances and has proved to be successful. This period in any business is crucial: being exceptionally crucial to a franchise as you are letting people know that a recognized brand leader is now operating in their area.

Maintaining a high-profile for the first few months, at least, is a cost you must budget for: if you don't need the anticipated budget, great! Even brand names have to go and get customers and you will soon see the tie-up between marketing budget and revenue.

Investigating the Franchise

The following will give you an idea of what is included in the documents and what they will inform you about.  If anything is missing or if you identify areas of concern, contact the franchisor to discuss your concerns:

Financial History

A very important section: it will give you information about the financial background of the franchisor as well as the business itself.  It will include everything from the credit rating of the franchisor to the main sources of income for the business.  It may be that the franchisor makes most of their money from selling the business than they make from the amount of royalties;

Legal History and Current Constraints

It might put doubt in your mind if the franchise has had any legal disputes. It may not just include offences, for example, trading laws, but also personal violation of conduct with previous franchisees.  This may suggest that the franchisor has tried to break the contract and is therefore not good at maintaining a relationship. These are things you need to look out for and be aware of before you enter into a contract;

If any legal issues are still a going concern, depending on the case, it may be that the business will have future complications which could damage the success of the franchise.  If anything is stated, or if there are signs that some truth is being hidden, you should investigate further. Using the Internet to search for information about your chosen franchise. Bad information can be good if you know about it when negotiating, and that the information is not too bad;

On-going Costs of the Franchise

Ensure that all appropriate costs have been included such as employee wages, advertising fees, operating licences, insurance and promotions;

Estimate how much you will be earning and whether it is sufficient to cover living expenses or even the expected income you stated.  It may be that other franchises may be less profitable but offer you more personal reward;

Commitments

The franchisor may expect you to remain with the same suppliers and customers that have been used by the business in the past.  They could also restrict you to what products you sell and where you will sell them.  You may respect that these links have created the success of the business and therefore are happy to continue with the trends.  To others, you may feel frustrated by the restrictions as it limits your business management and decisions;

Other express terms and conditions

These will include everything that the franchisor has produced that you have to agree to when buying the franchise.  Some of them will be legal terms and conditions and so are not negotiable.  The main issues will be the conditions on which the franchisor (and/or you) can terminate the contract and on which you can renew the contract or sell the franchise;

Current and Past Franchisees

If there are currently a number of franchisees in the business, you can investigate further to find out their level of success although it could be dependant on the area that they operate in.  If there are a number of current franchisees in your area (even one), it will produce competition and should be taken into concern;

If the franchise has had a number of past franchisees, it could suggest that the business isn't successful.  It may be that all has gone well for the current franchisees but the area that you are in has a situation of un-renewed or terminated contracts giving the reason that the area isn't profitable;

Details about numbers and success should be given in the document and should further give contact details of any current franchisees and those that have ended the contract (not renewing) within the last 12 months.

Lastly

As when buying or selling a business, the final negotiations of taking on a franchise should be handled by a practiced solicitor.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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