Becoming a Franchisee

There are various ways an individual or a company may enter the world of business ownership, such as becoming a franchisee. A franchise is the acquisition by a buyer (the franchisee) of the rights to operate a business from the original owner (the franchisor). The franchisor grants the franchisee the right to use its brand rights, know-how and business model within a specific territory, in exchange for payment of a fee.

As exciting as it is to become a franchisee, there are factors to take into consideration before entering a franchise. These include how to become a franchisee, as well as the benefits and risks of becoming a franchisee.

1. How to become a franchisee

It is important for an individual or a business to consider whether it is financially ready for this type of commitment. Franchisees often have to pay various fees to the franchisor with ultimately no guarantee that the business will be successful. This is why good planning is essential.

A potential franchisee must conduct thorough research on the franchises and industries it would be considering. In particular, it is recommended to consider various factors such as:

• the market;
• the franchisor’s reputation;
• financial performance;
• fees involved with becoming a franchisee;
• the expectations put on the franchisee; and/or
• the investment options.

2. Advantages

There are many advantages that come from buying a franchise. Here is a list of some of these advantages.

• Brand recognition would be the main advantage to become a franchisee. Franchises are mostly well-known businesses and have a client base already established.
• The business risks of becoming a franchisee are lower than setting up your own business. As part of the due diligence, the franchisor will likely have proven the success of the business. A franchisee will also benefit from the franchisor’s existing brand and operate under a business model which has provided results.
• Franchisors usually have an obligation to provide ongoing training to their franchisees and staff members. It is invaluable to get support from an industry expert in order to grow the business and navigate the challenges that can arise. This can also take the form of expertise in relation to the market.
• Entering into a franchise allows a franchisee to form contracts with external suppliers easily as a franchisee may benefit from the franchisor’s established relationships with its suppliers.
• A franchisee will have to incur costs and franchise fees. However, the return on investment is often much higher compared to independent businesses.
• Lenders tend to be more willing to provide loans and general financing for businesses’ start-up costs due to the higher chance of success of buying a franchise.

3. Disadvantages

Notwithstanding the above advantages, potential franchisees should also consider the following disadvantages of becoming a franchisee.

• The cost of purchasing a franchise can be substantial, including the franchise fee, equipment, inventory, and real estate. Additionally, ongoing royalties and marketing fees can be incurred.
• Franchisors are protective of their business and want to ensure that it will not suffer any damage. Franchisees must therefore adhere to the franchisor’s operational guidelines, limiting their ability to make independent business decisions.
• The success of a franchise can be affected by the overall performance or reputation of the franchisor and other franchisees. Negative publicity or poor performance at other locations can impact your business.
• Franchise agreements are typically for a fixed term. It is therefore important to understand the terms of renewal and conditions under which the agreement can be terminated.
• Potential conflicts need to be considered as well. Relationships between the franchisor and the franchisee may sour over time and disputes may arise. It is therefore important for the franchisee to do its due diligence before buying a franchise.

Becoming a franchisee offers a structured path to business ownership with the support of an established brand. However, thorough research is important before buying a franchise as well as seeking legal advice, and fully understanding the commitments involved. Our commercial team has a wide range of experience in advising franchisees and would be happy to assist both individuals and businesses with any issues and queries they may have.

For further advice and assistance, please contact our Commercial Solicitors on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk