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A way into a successful business model or a ball and chain?
Franchising can be either of these and we can help identify this before you make any big decisions. Our commercial lawyers deal with sales of franchised businesses and advise on issues which arise between franchisors and franchisees.
Should I buy a Franchise?
In many ways, franchising can seem to be a “win win” solution for both a brand owner who wants to expand at relatively low cost and risk, and an aspiring business owner who wants the lower risk environment offered by joining a proven brand.
The franchising industry often claims that most non-franchised new businesses fail before their third birthday whereas most franchised businesses are still trading long after.
We have sold franchised businesses where the retiring franchisee will proclaim how successful the relationship has been. For others, it has not worked so well. What accounts for the differences?
Firstly, most franchises require the payment of franchise fees, usually based on the turnover (not profit) of the franchised business. In a business, which has tight margins, the franchise fee can erode the margin so that there is not a lot left for the franchisee’s bottom line.
Successful franchises tend to be those where the franchisee enjoys tangible benefits throughout the franchise term. These benefits may be in the form of sharing of best practice. Some have centralised purchasing so that supplies can be acquired more cheaply; others have slick advertising campaigns from which all the franchisees benefit; in others, clever technologies are made available to the franchisees on an exclusive basis.
Problems arise where the benefits are not enjoyed throughout the franchise term. In some cases, the franchisee is grateful for the initial training but then gets little more benefit. The ongoing franchise fees are then essentially just giving him a right to keep using the brand name.
Also, a franchisee has to follow the rules set out in the franchise agreement. Although some are fairly simple, others comprise 50 pages of legal language. Some franchisees cannot follow their entrepreneurial instincts because they have to stay within the rules of the franchisor’s model.
When the franchise ends, the franchisee will usually be subject to non-competition covenants, which effectively exclude the franchisee from that line of business in the vicinity of his former franchised site for a period of time (usually 12 months). The legal logic for this is that franchising is like “leasing” goodwill, making money from it and then handing it back at the end. To set up in competition to the former franchise in the vicinity denies the franchisor the chance to perpetuate the goodwill in that area by appointing a new franchisee. Recent cases have confirmed the willingness of the Courts to enforce such restrictions.
Buying a franchise can often be a “win win” but it is not always the case and the decision requires careful thought and advice.
‘Pleasant and efficient, and able to build long-term, effective relationships with clients’, Ashton KCJ acts for the Franchise Trade Association and numerous medical commissioning companies. - Legal 500
Ashton KCJ commercial solicitors can assist in the following areas:
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