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How to find the right franchise

Nicola Lucas_detail

Franchising is experiencing a boom, particularly in the retail sector, with brands such as Costa Coffee, McDonald’s and Subway increasingly dominating the high street.

But, despite the temptation to view franchising as an easy route to becoming a business owner, lack of planning or failing to carry out thorough due diligence can mean that new franchisees struggle to make a success of it.

One of the key mistakes that franchisees make is failing to adequately review the franchise agreement. The agreement will set out the obligations on franchisees, which can be onerous. A common misconception is that being a successful franchisee means making a profit, but it’s rarely that simple. 

There will typically be monthly fees payable, which may include contributions to the marketing budget, as well as service levels to meet. The obligations will vary from franchise to franchise. Franchisors are usually very protective of their brands, and can be quite specific about how franchisees deal with complaints, for example, which is likely to be stipulated in the franchise agreement.

Franchisees may be asked to sign a personal guarantee, which may mean that they can be sued in the event the franchise company fails to perform its duties as set out in the agreement, putting your personal assets, such as any family home, at risk. It is worth instructing a specialist solicitor who can advise you on the full extent of your obligations from the outset and can advise on specialist terms. 

In the excitement of becoming a business owner, franchisees often overlook the need to at least consider a long-term exit strategy. From the outset, it is important to make sure that your business objectives are aligned with the franchisors. Franchisees are normally locked in for at least five years but some franchisors provide terms allowing a franchisee to sell in certain circumstances. Taking a long-term view from the start and picking a franchise that has appropriate support for new franchisees can ensure a smooth transition.

When carrying out your own due diligence, consider obtaining references from other franchisees. Are there any issues other franchisees have encountered? We recently acted for a client who complained that the website and online support of the franchisor was always down, which caused problems. 

Alongside the anecdotal, market research is invaluable. How well known is the franchise and has it a growing reputation? How is the brand perceived? You will most likely parting with significant amounts of your own money to fund the franchise, so due diligence is key. 

Franchising can be a great way to get a first taste of entrepreneurship if aspiring franchisees do their research, and understand what it entails. Franchisees are paying a corporate for its concept, brand and support, which makes it different to running any other business. 

Franchisees do not, however, have the creative freedom to change which products are to be developed or marketed, even if they think a new product will not sell in their locality. For some people, developing their own brand will be a better option but for those willing to work within the constraints imposed by the franchisor, operating a well-known franchise can offer a better chance of success than starting from scratch.

Nicola Lucas is an Associate at law firm Nockolds