So you want to be a franchisee…
Girlings’ Commercial Property Partner David Redgate, who has extensive experience working with franchisees in the fast food, beverage and fitness sectors, explains why it pays to do your homework.
There is no doubt that a franchise is a great way to become the boss of a highly successful business, with an established brand and/or product as many of my own clients have proved. Franchisors set out the legal structure of the franchise in slightly different ways but often they follow a general theme:
A franchise agreement is a legal contract and there is no such thing as a ‘standard document’ that will fit all businesses. Each is unique and tailored to the requirements of the franchise. It is vitally important to read the small print. The franchise agreement will contain conditions that oblige you to buy your supplies and stock from specific sources – this is often more expensive than on the open market. It will also require you to pay a percentage of your turnover to the franchisor. Some franchise agreements can be extremely tough, and might require you, for example, to refit your outlet out of your own pocket if the franchisor has rebranded.
An umbrella agreement with a franchisor is the contract framework with terms and conditions that take in potential possibilities within the lifetime of your franchise agreement and beyond. The umbrella agreement will set the exclusivity area in which you are allowed to find suitable sites for your business. Once this is set you will be unable to operate outside this exclusion zone. You will also need to notify the franchisor when you have found a potential site and they will often have the option of claiming the site for themselves - which does happen and which can be extremely disappointing. You might also be denied the site because it is deemed to be too close to another outlet already in the franchise or is not compatible with the franchisor’s brand positioning. It is important to make sure that your umbrella agreement allows you sufficient room to grow your business as sometimes the only other practical alternative for expansion will be to buy the business of another franchisee, a far more problematic route.
Entering into the Lease is the next step once the site has been agreed. Lease structures can vary, however, generally the franchisor will insist on having some control over the premises often in the position of a landlord. Alternatively, you can exist as co-tenants but with the more onerous tenant conditions applying only to the franchisee. I have found that even where a franchisee purchases the freehold they may have to grant a head lease to the franchisor and take back an under lease to create the landlord and tenant arrangement between the franchisor and franchisee. The lease will often carry some quite punitive restrictions for when you come to sell the property and or franchise as well as specific clauses relating to your particular business, often designed to give the franchisor control over who the new owner/franchisee will be.
Often as a franchisee you will set up as a company. In this instance, the franchisor will require you as director to enter into personal guarantees for both the franchise agreement and the lease.
Before you enter into a franchise you must do your homework particularly in respect to where the greatest profit lies - open your mind to new entrants in the franchising market, find out what percentage of your profits you will need to hand over and of course make sure you seek legal advice before you sign the contracts.
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