Erica Westerman, head of commercial and intellectual property at Berry Smith Solicitors, says that many Welsh companies are missing out on a golden opportunity to grow their business by ignoring the benefits of franchising
IF you are a small business owner looking to expand your company, one of the options you should be thinking about is franchising. Many people consider taking on a franchise as a way of starting a business but often it isn't the first thought that springs to mind when you're looking to expand, even though it is proven to be one of the most effective and successful ways of growing a business.
About 95% of franchises are in profit after five years, compared to only 45% of other independent small firms. Centralised costs and overheads are usually lower for a franchise network than for a network of company-owned outlets as few skilled staff can manage the entire network from a single central office.
Many of the names you see on the high street are franchises, with McDonald's, Thorntons, Kall Kwik, Bang & Olufsen, Clarks Shoes and Saks Hair & Beauty, to name but a few.
The main advantages of franchising for a franchiser are:
It minimises capital outlay;
It enables quicker expansion of the business;
Costs are borne by both franchiser and franchisee;
It leads to central savings such as reductions in head office administration and expenses;
There is invaluable local business and area knowledge input from the franchisee.
But before you start recruiting franchisees, there are a few things you need to know. If you don't have much time or are not able to make the necessary financial commitment, then franchising is not for you. Also, not all businesses are suitable to become a franchise. A product or service that is likely to have a market for a short time, such as a toy that will only have appeal at Christmas would not be a good franchise opportunity.
Likewise, a company that relies on predominantly repeat business customers whose loyalty relates to the individual providing the service and which would be difficult to transfer to a brand - marriage counselling for example - would probably not make a good franchise. It isn't a way to prop up a failing business either.
A franchise can be a very profitable way to expand your business but it shouldn't be something that you enter into lightly. Research the market thoroughly to ensure that your products or services are competitive and distinctive enough to be franchised and that customer demand is sufficiently widespread.
Once you're sure that you have a company that will work as a business you need to be confident that you can transfer the know-how about how you want the business to be run to other people, who will be operating at arm's length from you. It is also a good idea to prove that your company is capable of running as a franchise by running a pilot programme. The British Franchise Association suggests that you run it as a pilot for two years.
No specific legislation or regulations for franchising exist in the UK as yet. It is therefore extremely important that you seek professional legal advice from the outset to protect yourself and, more importantly, your trademarks and intellectual property (IP) rights.
If you are already operating a successful business, then it is likely that you will have taken the necessary steps to register your trademarks and IP rights. This is possibly the most important part of setting up as a franchiser. Other people are going to be using your company name and logo - ultimately it is your reputation as a company that is potentially at stake.
This will be covered in your franchise agreement, which needs to be drawn up by a solicitor. These can be very complex and not all solicitors have experience of doing this. So you need to choose one that has the necessary skills to best advise you on how to structure the agreement. As the franchiser, you will govern exactly what goes into it. It should cover areas such as franchise set-up, staff training, supply of goods and services, advertising, marketing and promotions, performance monitoring, royalties and rent, IP and management accounting.
You also need to include details of termination procedures if standards are not met and your reputation is suffering.
Your involvement as a franchiser does not end when you've signed up a few franchises - this is just the beginning. You won't see results straight away as it will take time for you to train up your franchisees, work closely with them as they get the franchise up and running and even be prepared to subsidise them.
You'll also need to constantly monitor the performance of your outlets, to ensure that quality levels are maintained and to identify and assist any franchisees that are in difficulties.
Your on-going commitment, through training, product development and other support, is vital to the success of your franchise network. But all this is worthless if you do not seek professional advice from a specialist solicitor at the outset and have processes in place to protect your interests as a franchiser."