You’ve built a successful business that’s got a solid reputation and good profits. What now? John Burns, a partner at Gateley Legal, discusses why franchising might be your next step.
In 1974, a nuclear physicist and a former college student were discussing how to hit their target of 32
‘Submarine sandwich shops’ in ten years. Despite achieving remarkable growth since their first store opened in Bridgeport, Connecticut in 1965, they were only halfway towards their target. What’s more, with a year to go, they were running out of time.
It was then that Peter Buck and Fred DeLuca, the founders of a now global and well-known sandwich chain, decided to launch their brand as a franchise, thus facilitating the expansion of their business into one currently occupying more than 44,000 locations around the world.
Stories like this explain why franchising sometimes feels more like a fairy-tale than a business model.
From humble beginnings in an office, market stall or garden shed, a business evolves into a global leviathan that’s recognised across continents, cultures, and language barriers.
While not all brands will achieve the dizzying success of Buck and DeLuca’s franchise (which, in case you hadn’t guessed, is Subway), it cannot be denied that franchising can be a viable model for businesses seeking the catalyst to further growth. The key to unlocking its potential is ensuring that both you and your business are suited to franchising, and its divergence from other models of business development.
Not just for coffee shops
It’s common to associate franchises with coffee shops, fast food, and restaurants, but any business with a replicable model and wide-ranging appeal can be suited to franchising. The British Franchise Association, for example, counts among its members such diverse businesses as a footwear retailer, a supplementary education provider, and a seasonal decorating company.
Once you’ve established that your business is profitable and outlined a territory in which it can be replicated, you can then grant permission for a third-party of your choice to use their own capital to launch a new business that, while operating as a separate legal entity, will retain the identity, branding, values, and services of the original.
The franchisor – franchisee relationship is built on trust and a solid agreement that protects your business and its intellectual property, but it also offers numerous advantages to both parties. For the franchisee, it provides the independence of running their own business, but without the risks
associated with starting a company from the ground-up. The franchisee has access to support, resources, and an already proven business model, not to mention existing brand awareness and the
reputability that this can provide. The success rate of new franchises underlines why this can be a popular choice for people who dream of being their own boss: only seven per cent of franchises fail in their first three years compared to 90 per cent of start-up businesses, according to the British Franchise Association.
While it can be difficult for some business owners to let a third-party ‘hold their baby’, the benefits of doing so can make all the difference to the business’s future growth rate. Expansion to new locations and territories requires significant capital investment – not to mention time spent researching prime locations, analysing local consumer habits, and negotiating leases for new premises. In the franchise model, the cost burden is largely passed on to the franchisee, who not only provides fees and royalties to you for use of your brand, but also uses their own capital to drive their franchise forward If you can avoid the temptation to micro-manage, you can also use your new franchisee for insight into developing the business and expanding its proposition. As well as different perspectives and experiences, the franchisee may also have a wealth of local knowledge that will be invaluable in achieving full market penetration in the new territory.
As your brand grows and its franchises multiply, so too will it become increasingly recognised by consumers. How many of us have chosen a familiar face for our morning cup of coffee when we’re in a rush because we know what to expect in terms of price, quality, and customer experience? As well as being convenient and consistent, franchises also exude a certain sense of reliability. After all, if the same business is appearing in multiple locations, then they must be doing something right.
An additional benefit of franchising is the weight it removes from your shoulders in terms of managing the daily running of a new business. You are essentially relinquishing this control to someone else which, while convenient, does come with its own set of challenges. Choosing the right franchisee, for example, requires patience and a great deal of due diligence, particularly if that person will have access to sensitive or confidential information.
Before embarking on any franchisor-franchisee relationship, you must be certain that the third-party meets all your requirements in terms of skill, experience and values. Do you trust them to run the business in a manner that maintains its good reputation and enhances its profitability?
You would be advised to solidify these expectations in the form of a franchise agreement. This will detail, among other things, training requirements, the payment of fees and royalties, and your rights regarding intellectual property and trademarks. This list is not exhaustive, and the strength of a franchise agreement can make or break your business model, so always seek professional advice before drafting an agreement or sharing it with a third party.
Finally, you need to ask yourself if your business is suited to franchising. Highly technical businesses that require lengthy training, for example, are not likely to flourish as a franchise proposition, while businesses in distress may not have the initial capital and resource required to develop an effective franchising strategy. Think carefully and remember: a franchise is not a sticking plaster for a failing business, but a doorway to expansion for a successful one.
Gateley’s team of franchising lawyers has extensive experience in handling contentious and non- contentious franchising issues. For more information, please visit: