The different choices in structuring the franchise
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
The different choices
in structuring the
franchise
By Nicola Broadhurst
BEFORE deciding on buys into and by
the most appropriate paying an initial fee and
franchise structure for continuing fees acquires
your business, it is the rights to operate for a
essential to establish that limited period.
it is franchiseable in the The system should
first place. allow the franchisee to
● Nicola Broadhurst is a Franchising is a term replicate the franchisor’s
partner at the Surrey law that is widely used and, business under the
firm, Stevens & Bolton, often misused to relevant controls and
where she is head of describe varying forms of with the latter’s
franchising. She is ranked licensing arrangements. assistance. A successful
in the top tier for franchise This article, however, business-format franchise
advice in the legal concentrates solely on is one where members of
directory, Chambers UK business-format the public can perceive
2011. A former member franchising. little or no difference
of the BFA legal committee, In order for a business between each of the
she assists the association to be franchiseable, there franchise outlets and the
in reviewing the franchise must exist valuable franchisor’s own outlets
agreements of applicants. know-how which is and in some cases is not
She advises potential and unique in some aspect to even aware it is a franchise
practising franchisors, the business, and which, due to the uniformity of
both domestically and together with the brand its image and standards
internationally, as well as name, forms a distinct of service.
franchisees. business system. It is this Having established
stevens-bolton.com system that a franchisee that a business is suitable
British Franchise Directory & Guide 51for business-format franchising, then unit, usually under separate franchise
the franchising structure that most agreements. This is often encouraged
appropriately meets the demands of the within franchise networks as a means
franchisor and its long-term goals must of incentivising its successful unit
be chosen. The main types of structure franchisees and allowing them to
are as follows. expand at a more controlled pace.
Unit franchises Obviously much will depend upon
the nature of the business as some lend
This is the most common form of themselves more readily to being run at
franchising. Under this arrangement, the a distance with effective management in
franchisee is granted the right to operate place. This method would obviously not
a single unit or outlet of the franchised be suitable where the franchisee’s full
business, subject to a franchise agreement. time and attention is required for each
These rights may be exclusive and the franchise.
franchisee may be allocated a trading It can, however, be potentially
territory, depending on the nature and dangerous for a franchisor to allow a
demands of the business. multiple franchisee to become too large.
Using this method of franchising, the This can result in an imbalance of power
franchisor may end up with an extensive within the network and should be avoided.
network of individual franchisees
spread across a large geographical area. Master franchises
Therefore, it is essential that the A perhaps less costly route of
franchisor has a suitable infrastructure expanding a franchise network is to
in place to provide the necessary support grant a master franchise. Under this
to the ever-increasing number of its arrangement, a master franchisee is
franchisees. In such operations it is granted the franchising rights to a
common for the franchisor to employ substantial territory, often a country.
area franchise managers who each look The master franchisee has the rights
after an area consisting of several to sub-franchise within the territory
franchisees, thereby providing the and grant individual franchises to
support on behalf of the franchisor. prospective franchisees. Occasionally,
Problems arise where the franchisor the master franchisee will also have the
does not have the financial or human right to enter into franchises itself, and it
resources to adequately support its is a good idea for the master franchisee
franchise network and it is easy to see how, to initially run at least one pilot operation
without the necessary quality checks and within the territory for a period of time
assistance from the franchisor, standards before sub-franchising to establish the
can slip and customer service is commercial viability of the business and
adversely affected. This impacts on the its credibility when it comes to selling
brand image and, therefore, the network franchises itself.
as a whole. Lack of support is one of the The master franchisee to all intents
most common complaints by franchisees. and purposes steps into the shoes of the
franchisor for his territory and it is a
Multiple franchises useful way of expanding into new
This term is used to describe countries and exporting a business
franchisees that operate more than one concept.
52 British Franchise Directory & GuideIn such cases the franchisor will An overambitious target may cause
rely on the master franchisee’s local the master franchisee to focus on
knowledge and contacts. The master selling too many franchises too
franchise agreement usually recognises quickly without having the ability to
this fact by permitting the master support them, resulting in inevitable
franchisee to make necessary adaptations failures.
to the system to take into account The success of this method of
cultural differences and jurisdictional franchising will, of course, depend
issues once these have been agreed. upon the choice of the master
A clear agreement should be drawn franchisee. The individual chosen
up at the outset, detailing the respective must have the resources, drive and
rights and obligations of both parties. wherewithal to be able to exploit the
Where the area concerned is another territory to its full potential and to
country then relevant local advice support its franchisees.
should be sought to ensure that the Problems can obviously arise where
agreement is enforceable and whether the relationship breaks down between
there are any tax issues that need to be the master franchisee and the franchisor.
considered. Where the franchisor is based in
This method can be an extremely another country, this can often leave
effective way of expanding quickly into the franchisees without any real support
an area where the franchisor lacks the should the master franchisee drop out of
resources and capabilities to develop it the picture.
directly itself and it is a way of sharing Even where the franchise
the costs. The master franchisee will agreement states that the franchisees
usually pay to the franchisor an within the territory are transferred back
increased initial fee to reflect the to the franchisor, this is of little help
where the franchisor has no other
business potential of the territory and
representatives within the territory.
rights being granted, and also a
Prospective franchisees must,
percentage of the income generated
therefore, be aware of the possible
from its franchisees.
consequences of contracting with
In order to ensure that the master
master franchisees.
franchisee is exploiting the territory,
effectively the master franchise Regional franchises
agreement often contains performance This is similar to the master
targets linked to the number of franchise arrangement, except that a
franchisees to be granted at each large territory is divided into several
anniversary of the agreement. Having areas and a master franchisee appointed
some form of performance targets is for each area. This is particularly suitable
important as a master franchisee is for large geographical areas, such as
invariably being given the exclusive U.S. or India. In such cases, a single
right to grant franchises in his territory master franchise for the whole country
over a longer period of time than would would not be ideal as it is too large an
usually be granted to an individual area. A single master franchisee would
franchisee, but these targets must be tend to concentrate on one area rather
realistic. than the whole country. It is, therefore,
British Franchise Directory & Guide 53better to divide the task. Again, each entered into governing the relationship
regional franchisee would pay an and setting out the agreed schedule of
increased initial fee and usually a development, some times with a
percentage of the income generated by separate form of franchise agreement
the franchisees. attached to be signed each time an
The attraction of receiving the outlet is opened.
increased upfront fees, can, however, The agreement is often the subject of
lead franchisors to choose this method much negotiation as a developer will want
of franchising when it is not really to ensure that the targets are achievable,
suitable, for instance where the territory whilst the franchisor will want to exploit
being divided cannot support the number the area fully and receive its fees.
of franchisees which the franchisor This method can be more attractive
anticipates. The result is the regional to a franchisor as it involves dealing with
franchisee parts with a significant sum one person rather than many, but it can be
without any means of recouping its a slower way of expansion as individuals
investment and making a profit. or companies are not always easy to find
Careful research into such a business who have sufficiently large resources
proposition needs to be carried out by a to be able to finance the opening of a
prospective regional franchisee before number of units themselves.
any commitment is made in order to Joint ventures
establish its commercial viability. Occasionally, a franchisor will wish
Another inherent problem of regional to become more closely involved in the
franchises is that comparisons can often investment made by a franchisee and
be easily made within the network will acquire shares in the company
between the various regional franchisees being established by the franchisee. The
and their respective abilities. Where franchisor may take a different class of
there is disparity this can cause shares, which may have no voting rights.
considerable discontent. A joint venture can be attractive to a
Again, the care and consideration franchisee who perceives the franchisor’s
taken in choosing the appropriate regional keenness to participate as an indication
franchisees cannot be overestimated. of a greater level of commitment from
Much will depend upon the interpersonal the latter. The arrangement can, however,
skills, business acumen and resources of turn out to be more risky for the
each regional franchisee. This is often franchisor, who will be exposed to a
overlooked by franchisors keen to obtain greater degree of liability as a shareholder.
substantial upfront fees. A shareholders’ agreement should
Area developers be drawn up to clearly delineate each
party’s rights and obligations, together
This is similar in some respects to
with supporting articles of association.
multiple franchises, but is less of a
Unwinding a joint venture, however, can
piecemeal approach and more focused
be fraught with difficulty and this
at the outset. A developer is usually
method of expansion has not been as
granted the rights to develop a large
popular as others.
area directly, but without the ability to
sub-franchise. Choosing the structure
An area development agreement is The arrangements we have looked at
54 British Franchise Directory & Guideare not mutually exclusive and often be more expensive to establish unit
franchisors use a mixture to expand franchisees across the country and
their franchise network. support them in an effective manner
The prospective franchisor must than it is to grant a regional franchise or
ask itself what it wishes to achieve a master franchise. A master franchise
by franchising. In some cases, it will can also be a relatively cheaper way of
be a desire to increase revenues by expanding very quickly into other
establishing a nationwide or even an countries, although obviously as trust is
international business, whilst in other being placed in one individual, this can
cases it maybe in an effort to protect its be very risky.
market position, or to exploit its products It is essential that prospective
more effectively. franchisors seek appropriate advice at
If the franchisor wishes to expand the outset to ensure their long-term
internationally it should first establish goals are taken into account when
what local laws govern franchising. developing the franchise model and that
Certain countries have franchise specific it is commercially viable. Within the UK
laws which may impose disclosure and the structure adopted must not infringe
registration formalities This adds to the the pyramid selling regulations and
costs. there may well be tax considerations to
The answers will largely determine be taken into account.
which structure is chosen. Franchisors need to avoid falling
Much will depend on the financial into the trap of making a quick profit
resources of the franchisor or the from a venture that turns out to be in the
availability of additional funding. It can long-term a costly mistake.
‘ It is essential that prospective franchisors
seek appropriate advice at the outset to
ensure their long-term goals are taken into
account when developing the franchise model
and that it is commercially viable.
’
British Franchise Directory & Guide 55You can also read
