For the owner of a brand, creating a franchise is an effective method of expansion. However, the highest risk is relying on others to make a capital investment. Franchising can be used with well-known brands such as McDonalds but likewise, a small business which has created a successful brand with an established identity and confirmed business structure can use the benefit of a franchise. Franchising can be complex so advice is recommended.
The advantages for the franchisor is that they would have developed a successful business with a well-known brand and by selling a franchise the business can expand but reduce the risk to considerable capital expenditure without employing additional staff.
However, there are disadvantages. The franchisor must select partners for the franchise cautiously to reduce the risk of damage to the brand. The franchisor can lessen the risk by delivering suitable training.
As a franchisee, purchasing a franchise provides less risk as the brand is a proven formula and the risks attached with business start-up is reduced. As the franchisee is obtaining a successful brand, he can save time and cost by not having to develop his own.
However, although the franchisee is purchasing a successful brand, he will have to make a large capital investment to acquire the franchise. The franchisee must delve into the business projections to ensure the purchase will not fail.
The focus of a purchasing a franchise is a contract. Normally the franchisor licenses his brand and business structure to the franchisee. There may be a number of further contracts covering employment, equipment, lease of the property and training to name a few. The contract will contain terms relating to intellectual property. Here at Seatons, we can draft a franchise agreement for you tailored to your specific needs.
Before committing to purchase a franchise, an in-depth valuation should be thoroughly prepared to assess the risk. The total cost of the franchise should be considered alongside the brand of the franchise. Furthermore to reduce risk, an assessment of other franchises of the same brand within the geographical area should be considered to ensure you can make profit.
When purchasing a franchise, careful consideration should be taken in regard to the contractual obligations in relation to termination. Can the franchisee end the contract if business declines or sold to a third party?