Franchisees – acquiring a franchise business and some key considerations
If you are looking to start a business, rather than starting a new business from scratch it may be best for you to buy into an established franchise business.
In this article we will set out some of the main advantages and disadvantages of acquiring a franchise business and certain legal matters you should consider carefully for before entering into a Franchise Agreement with a Franchisor.
Advantages of acquiring a franchising business:
Some of the main reasons for acquiring a franchise business over starting up your own business from scratch are as follows:
- Established business and known brand – One of the main advantages is operating your business under an already established business name, with operating techniques, know-how and systems already in place. This should mean (in theory) there is less work and costs involved in trying to establish and build on the brand of the business.
- Business support and security - Franchises offer the advantage of a support and security system, with Franchisors often offering training schemes and support with matters such as sales, marketing and the management of accounts. However, such assistance is likely to come at a cost to you as part of the fees payable by you to the Franchisor under the Franchise Agreement.
- Commercial relationships – You can also take advantage of the commercial relationships already established by the Franchisor under a franchise arrangement, including relationships with suppliers and marketing teams, giving you more time to concentrate on managing the business.
Disadvantages of acquiring a franchise business:
Some of the main reasons for not acquiring a franchise business over starting up your own business from scratch are as follows:
- Lack of control – Under a franchise arrangement a Franchisee will have no (or little) control of the business and how it is run under the terms of the Franchise Agreement. This also usually includes being tied down in using specified pre-approved suppliers by the Franchisor, which may not always be the cheapest suppliers to use.
- Risks from other Franchisees – If you will not be the sole Franchisee under the franchise arrangement, then there is the risk that other Franchisees might damage the reputation of your business if they did something to damage the reputation of the brand, which could have a knock on effect on your own business.
- Franchise costs – A Franchisee will often be expected to pay an initial cost to buy into the franchise business and then as part of the continuing franchise arrangement they will be paying continuous and recurring fees for the support and training provided by the Franchisor and usually a form of royalty for the income or profit generated by the franchise business. These are costs and expenses you would not incur if setting up your own business from scratch.
- Difficulties exiting franchise business - Selling a franchise business can be more problematic than selling your own business as any buyer will be bound by the terms that have been negotiated with the Franchisor when a franchise was granted and a Franchisor is likely to want to have the right to approve the buyer of your franchise business before the sale may proceed.
Franchise Agreement – key terms to look out for:
Before entering into a Franchise Agreement, it is important to look out for the following important terms:
- Costs – To check the initial franchise fee and royalty payments you have discussed and agreed with the Franchisor are set out in the Franchise Agreement and any other costs you may be liable for, for example the Franchisor may require a percentage of the total sale proceeds if you decide to sell your franchise business in the future.
- Territory – Usually the Franchise Agreement will specify where you may (any may not) operate your business from. It is important to check whether you will be the sole and exclusive Franchisee in that Territory, or if other Franchisees could operate in the same territory as you.
- Restrictions on other business interests – If you have other business interests you will need to check the Franchise Agreement to see if you are prohibited from continuing these interests, as often a Franchise Agreement will require you to devote all (or a substantial amount) of your time to the franchise business. In addition, you will need to check the post-termination restrictions in the Franchise Agreement as these could have a significant impact on you and your ability to carry on in your chosen business industry following termination of the agreement.
- Your obligations – It is important you understand your obligations under the Franchise Agreement, as these are often extensive for a Franchisee and will need to be complied with to avoid the agreement being terminated early by the Franchisor.
- Entire agreement – A Franchise Agreement will usually include a clause which states that the agreement represents the whole agreement between the Franchisor and Franchisee. Therefore it is important any terms agreed with a Franchisor as part of negotiations or preliminary discussions not included in the agreement are included if you wish to rely upon these.
If you are looking to acquire and commence a franchise business as a Fanchisee, it is important legal advice is obtained before proceeding to ensure you are fully aware of the important terms under the Franchise Agreement that you will need to enter into with a Franchisor.
If you require any further information or advice on the above, including reviewing the terms of a Franchise Agreement provided to you by a Franchisor, please do not hesitate to contact Scott Richardson by phone on 01329 227907 or by email on [email protected].
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice, and should not be relied upon as advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. All content was correct at the time of publishing. Legal advice should always be sought in relation to specific circumstances.