Expedient Expansion: The Franchisor’s Perspective
The franchise model of business is well-known. We see it in a wide variety of forms, within industries from gardening and fast food, to bookkeeping and conveyancing. There’s a reason for its prevalence, too: it’s an effective way for businesses to expand. So, if you would like to expand your business, you may have considered becoming a franchisor. But what exactly does that entail? The first step to becoming a franchisor is to identify prospective franchisees, that is, the people who will purchase the franchise rights to your business.
Once you’ve identified the prospective franchisees of your business, the next step is to reach an agreement as to the nature of the rights they will purchase, and the cost of the purchase. Franchise arrangements can be complex, in certain cases. From a legal perspective, there are numerous intricacies that must be addressed by a franchise agreement. And then there’s the ongoing franchisor-franchisee relationship to consider. It’s important that your rights as a franchisor are protected, but it’s also important that your franchisees preserve their rights too. To gain a good grasp of what must be addressed within a franchise relationship, it’s important to know more about the franchise model itself.
What is the franchise model and how can it apply to your business?
At its most basic, the franchise model is a business model that shares certain responsibilities, to deliver goods or services to customers. Exactly what responsibilities are shared, and how, will depend on the franchise agreement. And from your perspective, as franchisor, it’s important that you strike the right balance. To become a franchisor, it’s necessary to concede certain rights to your franchisees. That will allow them to carry on a largely independent business, which is the essence of a franchise arrangement. However, your concession must leave you with the right amount of control over the commercial operations of your franchisees. After all, the success of your business model is what prompted franchisees to purchase franchise rights in your business to begin with. It’s important that the integrity of your business model remains.
Luckily, the franchise model of operation comes in all shapes and sizes. There is room for you to set your own terms, and ensure that the arrangement is commercially rewarding for you. A great example of that is fees. Most franchisors charge fees, which reflect the ongoing support you provide to your franchisees. But you can vary your fees according the nature and extent of the support you offer. If you prefer to take an active approach in the management of your franchisees, you may wish to provide them with extensive marketing materials, services, branding opportunities, and support. If that’s the case, you’re at liberty to charge greater fees, if you feel they are warranted. Alternatively, you may wish to allow greater autonomy among your franchisees, with little active input on your part. If that’s the case, you can adjust your fees to be lower, which may encourage greater franchisee engagement. The terms of your franchise agreement are ultimately up to you, but I suggest getting help from an experienced commercial lawyer to draft yours.
Franchise arrangements have advantages and disadvantages: here’s what to consider
Like any method of commercial expansion, franchising has advantages and disadvantages. Both are unavoidable, so it’s important that you’re familiar with the pros and cons before you enter into a franchise arrangement. With a clear knowledge of the benefits and shortfalls, you can determine whether franchising is the best way for your business to expand. So, to help you on that front, I’ve put together a quick list of pros and cons below.
Advantages: how you can benefit from becoming a franchisor
The foremost advantage of becoming a franchisor is rapid business expansion. With franchising agreements, your commercial reach can expand far more quickly than it can using alternative methods. In addition, you get the benefits of improved efficiency, with each franchisee adopting your systems, branding, and network. Then there’s capital: franchisees finance their own establishments under the franchise model. That means your business will not need to increase its capital liability to enjoy the benefits of expansion. Most of the risk is assumed by individual franchisees, and even they have less risk to contend with, thanks to the tried-and-tested systems you provide them with. Further, franchisees are likely to be established in their local areas. They will have professional networks in places that you are unfamiliar with, which means they stand a better chance of successfully expanding your business in a geographical and commercial sense.
Disadvantages: some potential shortfalls of franchised expansion
For the most part, the disadvantages of becoming a franchisor relate to control. Part of the trade for rapid and lower-risk expansion is the conventional top-down control you would see in businesses that expand organically over time. Generally speaking, you lose control over things like staff management (hiring and firing in individual franchises), retail pricing, and product margins. However, one of the more significant disadvantages is the distribution of resources. Under most franchise agreements, you will allocate resources of a certain value to each of your franchisees. However, you cannot guarantee that all franchisees will perform to the same standard. That means you might find yourself in a position where you must continue allocating resources and support to a franchisee that is underperforming.
If you’re planning on becoming a franchisor, here’s what you need to do
I’ve covered some of the broader advantages and disadvantages of franchising in this guide. However, it’s important to remember that franchising arrangements vary significantly. Often, they reflect the precise nature of the product or service you’re offering, as well. That means it’s imperative that you get tailored advice before considering franchising as a means of expansion. I suggest you seek the advice of an experienced commercial lawyer. With professional advice, you can ensure that your business is well-positioned to adopt franchising as a method to expand. An experienced lawyer will be able to identify the aspects of your business that need change, and those that are well suited to the franchise model. And, most importantly, they’ll be able to draft a franchise agreement that safeguard your rights as franchisor!
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Joe Kafrouni, Accredited Specialist in Business Law, Kafrouni Law
Disclaimer: This article is general information only and is not legal advice. Before acting on it, get advice on your own circumstances. To the extent the law allows, Kafrouni Law accepts no liability for any loss arising from reliance on it. This article is the copyright of Kafrouni Law.
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