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As a relatively new franchisor, I have noticed that some of my more experienced colleagues are cuddling up to potential franchisees by calling them “franchise owners”. I’m tempted to follow this new fashion, but I have a nagging feeling that the term might come to infer to my so-called franchise owner that they have some proprietary rights to my franchise system.

Could I find myself having created a rod for my own back? Should problems arise down the line could I find myself in court trying to convince a franchisee-sympathetic judge that I hadn’t misled my franchise owners into believing that their territories included some equity in my franchise system? I am justified in being a little nervous?

Dr Mark Abell (pictured), joint head of the franchise and licensing team at the City law firm, Field Fisher Waterhouse, answers the question.

You are right in that there is a discernable trend for franchisors, including some who are among the longest established, to describe their franchisees as franchise owners.

Presumably the logic of this term is that a franchisee owns a franchise – ergo he is a franchise owner.

Presumably the phrase has been created, as you have suspected, by an over-creative franchisor who felt it would be warm and cuddly to give its franchisees a feeling that they owned a business, rather than just a franchised outlet. The franchisor would have seen it as a marketing ploy that would encourage potential franchisees to join and would differentiate its franchise from those of its competitors.

That seems reasonable and harmless enough. Or does it?

The short answer is a resounding, no. It is a dangerous perversion of established legal terminology that could seriously back fire on a franchisor if he ever has to litigate on an agreement in which the franchisee is referred to as a franchise owner.

That may sound a slight over reaction, even verging upon hysteria, but it isn’t. It’s a reality.  Let’s go back to basics to understand why.

Moshe Gerstenhaber, the celebrated founder of the franchised print and design firm, Kall Kwik proffered an incisive view of franchising. He suggested it was “a system leasing arrangement under which the franchisee acquires from the franchisor a licence to duplicate the franchisor’s existing and successful system of providing a product/service to the end user”.

It is not a perfect definition, but it does touch on the underlying commercial arrangement between the franchisor and its franchisees – the permissory and temporary nature of the franchisee’s rights to use the business format and other intellectual property of the franchisor.

This view is reflected in the 29 countries that so far have introduced franchise-specific legislation. All of them, ranging from France, Belgium, Spain, Italy and Sweden in Europe to China, the U.S., Brazil and Vietnam, take this view. In general terms, it manifests itself in one of two basic approaches to defining franchising.

The so-called marketing plan definition, and so-called common interest definition. The former originates from the Californian franchise law – the first in the world.

It describes franchising as existing when “a franchisee is granted a right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by the franchisor …. in connection with a trade mark in return for  a fee”.

The community of interest definition, first found in the laws of U.S. states such Wisconsin and New Jersey, provides that there must be a common financial interest between the franchisor and the franchisee, and the franchisee is granted the right to use the relevant marks and carry on the business in return for a fee.

Both these long-standing approaches stress the temporary and permissory nature of the franchisee’s rights.

It is also not only legal definitions  that reflect this approach. The BFA’s own definition is based on that of the European Franchise Federation. This defines franchising as being a relationship whereby “the franchisor grants to its individual franchisee the right …. to conduct business in accordance with the franchisor’s concept.”

All these definitions are based on the fact that the franchisee does not own a franchise, but is granted the right to operate one and that it is temporary right. To use a conveyancing analogy, a leasehold is not a freehold. It follows from that that the franchisee is, therefore, not a franchise owner.

But so what, you may ask? What difference does it make? Well, quite a lot.

If a court was to hear a case based on an agreement that called the franchisee a franchise owner it would most likely encourage the judge, who generally starts from a pro-franchisee position (protecting the little man from the bullying approach of the large corporate), to take a still more entrenched pro-franchisee view.

That is not to say that the terms of a properly written franchise agreement would be set aside wholesale merely because of the use of the term franchise owner. It is far more subtle than that.

Consider, for example, the Natural Life case. Despite good evidence to the contrary, the court of first instance held in favour of the franchisee and that the managing director of the franchising company was personally liable. It was left to the Court of Appeal to sort things out and reverse the decision.

There are many other cases of a similar ilk. For example, the Chips Away case  in 2009 held for the franchisee at first instance, but it was emphatically overturned on appeal with a strong suggestion that the original judgment was totally wrong.

When a franchisor has to litigate against its franchisees it needs every advantage of which to avail itself. It certainly can’t afford to alienate the court through the use of soft and  inaccurate terminology.

So, using the term franchise owner is both incorrect and dangerous. The questioner is right to have been concerned about its increased use. It is something that I would warn franchisors and their advisers to avoid at all costs.

The AFA is charging an annual fee of £485 to franchisors and £980 to suppliers, both subject to VAT. Franchisors have the option of including the AFA’s logo on their franchise agreement for a one-off charge of £980 plus VAT.

There are three criteria for franchisor membership – a trading history, testimonials from two franchisees, and confirmation of their commitment to the code of ethics of the European Franchise Federation.

The new body, based at Exeter, has been formed by Craig Brittain, the franchisor of Charisnack, the supplier of snacks to the workplace, who has experience in retailing with Marks & Spencer, Windsor Farm Shop, Daylesford Organic, and Dunelm soft furnishings.

“The introduction of a new association can only be of benefit to this vibrant sector of the economy,” he said.

Michelmores, a law firm at Exeter, has provided legal advice to the AFA through Richard Cobb and Anna Baker. “Its guiding principal offer franchising a viable alternative association and accreditation system to address the issues involved in a highly professional manner,” said Cobb.

The strategic relationship means that Moreland, a member of the Willis Commercial Network, one of the world’s largest insurance intermediaries, will be able to offer new, exclusive benefits to members of the BFA in recognition of their dedication to, and investment in, ethical franchising.

The company specialises in products and packages tailored to the unique requirements of both franchisees and franchisors, with innovative polices recognising the specialised risk in franchising.

Maurice Logie (right), owner and director of Moreland, said: “Franchising has always been of great interest to me. We have supported the industry for many years and have done all we can to get behind important activities such as the BFA’s Scottish Franchise Week.”

“The sector represents tenacity and stability – attributes which are attractive to our key partners in the insurance industry – and this new relationship with the bfa enables us to enhance our previous work in the industry and demonstrate our long term commitment.”

The partnership, part of a strategic drive by the bfa to engage with suppliers to the sector, will see Moreland working alongside the Willis Affinity team, creating the ability to offer the right insurance solution for any size or complexity of franchise.

Brian Smart, Director General of the BFA, added: “Moreland is now a brand well regarded in the industry and that is largely a result of the unwavering commitment by Maurice to pursue excellence in the services he provides to ethical franchising.”

“Insurance is an area of business that we all need to take seriously, whether we like it or not, and it is a great comfort that we are able to find a partner in this field as passionate about franchising as we are,” added Smart.

Williamson (right) has 20 years financial and business experience, having worked for DHL Express and Rentokil Initial Washrooms and Textiles Division, where he was based in Belgium and had responsibility for managing change across 16 businesses throughout Europe.

“I was looking for a new challenge and this opportunity with Driver Hire came along,” says Williamson. He has completed the company’s two-week in-depth training course to learn the basics of his new business.

“Our focus will be on client retention and delivering added value to our market-leading service,” said Williamson.

Driver Hire provides temporary and permanent drivers and other logistics staff to local and national organisations in both the public and private sector, when companies are short of staff due to either illness, holidays or seasonal demand.

Kall Kwik has been bought by one of its former managing directors, Nigel Toplis, and Prontaprint bought by two  former directors.

Toplis, who left Kall Kwik in 2002, will now run the network, under the name, New KK, within his Bardon Group as a licensed, rather than a franchised, operation.

Both Kall Kwik and Prontaprint have left the British Franchise Association (BFA) of which they have been long-standing supporters.

ODC was formed in 2000 after the two print networks came under the same ownership to make economies by merging their headquarters back office functions.

Franchisees of both brands have for some time been increasingly critical of the level of support from ODC. Last July a long-running dispute between a large action group of franchisees and the company was only settled through mediation and offers by ODC to increase its investment in marketing and re-negotiate their franchise agreements.

The franchisees were also given the opportunity to withdraw from the franchises without penalty and run their businesses independently under new names.

Around half the group chose the latter option and are now expected to form voluntary co-operative buying groups for materials, equipment and products, particularly paper, ink and graphics software, to regain some of the major benefits they enjoyed as franchisees.

Pioneers of franchising
Both Kall Kwik and Prontaprint were pioneers of franchising in the UK with Prontaprint having been founded in 1970 by Edwin Thirlwell and Kall Kwik in 1978 by Moshe Gerstenhaber. The two chains battled for the number one spot in the then new quick print marketplace. The two founders subsequently both made millions from the sale of their businesses, Thirlwell moving to Jersey and Gerstenhaber to Switzerland.

One of the legacies of the two chains has been to create a cadre of experienced franchise managers, such as Toplis, who now hold important posts around the sector. Thirlwell and Toplis are past chairmen of the BFA.

The brands both went on to earn Business Superbrand recognition under the ownership of the Adare print group and later an Irish investment firm. Their top performing franchisees reached turnovers of more than £1m.

Toplis has added Kall Kwik to his Bardon Group, which has three franchise systems, Recognition Express (corporate badges and awards), ComputerXplorers (computer training for three to 13-year-olds) and Zip Yard (retailers of garment alterations and repairs).

Kall Kwik was formed by Gerstenhaber as the UK master franchise of a U.S. international franchisor, Kwik Kopy of Houston, Texas, and following the appointment of administrators, the American firm approached Toplis to save the UK business. As a result, he acquired the sub-licence for the Kall Kwik trademark in the UK and Ireland.

“Although I left Kall Kwik in 2002, I was asked by Kwik Kopy to get involved after it fell into administration,” said Toplis (right). “This was something I couldn’t turn down. I believe the arrangement we have now reached with all parties lends itself to a new era for Kall Kwik and will lead to the strengthening of the brand in the marketplace.

“I have always had a very personal attachment to Kall Kwik and remain close friends with a number of its franchise owners. When I was at the company we were very proud of the work we all did in building the brand and its position as the number one quick printer in the UK.”

Mediation
Mark Abell, a leading franchise lawyer with Field Fisher Waterhouse, represented the franchisees of Kall Kwik and Prontaprint in their recent mediation with ODC.

He recalls: “Some 18 months ago we started acting for more than 120 franchisees of the two brands in a dispute about the level and quality of support that they were being provided by their franchisor.

“In May last year, 67 of the franchisees agreed to enter into mediation with ODC and, as reported in Franchise World magazine (No.184 August, 2011), as a result of the mediation the majority of the franchisees decided to exit the franchise without restrictions. They are now operating successfully as independent businesses with many of them sharing resources. However, a number of the franchisees remained committed to the brands and continued operating under them.

“The challenge for the new owners is to rebuild the brands to their former glory. I wish them the best of luck in doing so.”

Note of caution
Sounding a note of caution, Abell said that the fate of the two brands prompted one to consider the way in which franchisees of other systems might also be impacted by the continuous development of technology. The situation perhaps offered a lesson about sustainability and the need for franchisors to keep up with changes in their particular market.

“The competitive environment in sectors that are heavily based on technology, such as telecommunications, photographic services, and printing, have changed beyond recognition over the last 20 years,” said Abell. “The advent of digital and other technologies have not only improved quality, but also developed new products and channels of delivery.

“Franchisors operating in such sectors who have anticipated these shifts and rigorously implemented change management strategies throughout their network have prospered, together with their franchisees. Those who fail to adequately embrace changes for whatever reason can find the going very tough with margins falling, the development of new competitive products, and their competitors’ levels of service improving.

“In challenging times, there may be a temptation for franchisors to preserve their own margins at the expense of their franchisees by reducing the levels of support they offer them,” Abell added.

“This is something that the BFA needs to be aware of as it is likely to become more and more of an issue over the coming years. Perhaps it should even consider adding some words to its Code of Ethics to require franchisors to make reasonable endeavours to ensure that their franchisees are kept up to speed with the relevant, sector-critical technology.”

A fourth company in the group, 1st Local also went into administration. This ran company-owned stores in London (two), Bristol and Middlesbrough, and these have been closed. There have been 62 redundancies across the four companies.

To exhibit visit the members’ area of the BFA website.

The sales and international development director of the show is Christophe.Angleys@reedexpo.fr.

The thesis is the product of over five years intensive research on the laws of franchising in over 50 countries, including the 27 EU member states. His thesis, the first of its kind, will be published as a book.

Lack of data
Abell, says he started his research back in 2006 because “there is a complete dearth of objective academic analysis of how franchising is regulated in the EU, and the impact the regulatory regime has upon business.”

He continues: “This lack of objective data has made it impossible for the EU Commission, member state governments, and national franchise associations to adequately understand the impact that the current legal regimes are having on franchising and its ability to actively promote cross-border trade within the European Union.

“It also makes it difficult for both large companies, and small and medium-sized enterprises to understand how to best re-engineer their corporate business and successfully use franchising to expand across the 27 member states that comprise the EU.”

Franchising underperforming
Through a combination of empirical research and comparative legal analysis,  Abell’s thesis highlights the failure of franchising to realise its full potential to contribute to the EU’s economy due to the heterogeneous nature of law in each of the 27 member states, and the lack of any EU franchising law. It then makes a number of radical proposals to better regulate and promote the use of franchising within the single market.

Abell identifies franchising as a specific, distinct and uniform type of commercial activity with significant economic impact in the EU. It stimulates economic activity by offering significant advantages to all those involved, improving distribution, and giving business increased access to other member states. There are nearly 10,000 franchised brands in the EU, which account for over Euros 215 billion (U.S. $300 billion) turnover per annum.

However, after comparing European franchising to the scale of franchising in the U.S. and Australia, Abell suggests that franchising is not realising its full potential in the EU.

The facts are rather stark. The EU has a population of 500 million and a GDP of $16.1 trillion, the U.S. a population of 310.9 million and a GDP of $14.6 trillion, and Australia a population of 22.5 million and a GDP of $1.2 trillion.

However, whilst the turnover of franchising in the EU is $300 bn (1.86 per cent  of GDP) accounting for a turnover per head of population of $600, the U.S. has a turnover of $868 million (5.95 per cent of GDP) accounting for a turnover per head of population of $2,792, and Australia has a turnover of $130 bn (10.83 per cent of GDP) and a turnover per head of population of $5,777.

In other words, franchising has over four times greater penetration in the U.S. and nearly 10 times greater penetration in Australia.

However, this is not the full story. The real situation is even more disappointing, as there is a disproportionate concentration of franchising in just five member states – the UK, Germany, France, Italy and Spain. Of the $300 bn turnover of franchising in the EU, 83.5 per cent is concentrated in a quarter the EU member states. This is evidence that franchising is not promoting trade between member states as much as it could and should.

Inappropriate laws cause underperformance
Abell’s thesis shows that this under-development of franchising in the EU is, in part, due to the regulatory environment to which it is subject. This is primarily because of two distinct factors.

Firstly, a failure by the member states’ regulatory systems to adequately govern franchising. They fail both to adequately reinforce the economic drivers that attract franchisors and franchisees to franchising, and reduce to an appropriate level the inherent consequential risk to which both parties are exposed.

Secondly, there is a lack of homogeneity between the different legal systems which amounts to a barrier to trade between member states.

Eight EU member states have franchise laws, but no two of them are the same.

Other jurisdictions, such as Germany and Austria apply a wide range of consumer laws to over regulate franchising – despite clear statements from both the EU Commission and the European Court of Justice that this is not appropriate.

EU franchise law needed to promote the use of franchising
Abell proposes the adoption of a European Franchise Directive which will not only harmonise the approach of the EU’s legal systems towards franchising, but will also re-enforce the relevant economic drivers and reduce the inherent consequential risks to an appropriate level.

He suggests that the directive should be drafted so as to attract business to use franchising by promoting market confidence in franchising, ensuring pre-contractual hygiene and imposing a mandatory taxonomy of rights and obligations on the franchise relationship.

The thesis suggests that franchising be defined in accordance with the so-called marketing plan approach that originated in the U.S. and is found in various forms in six of the eight EU member states with franchise specific regulations. It focuses on independence, economic interest, the brand, the business-format, control and ongoing support.

It also includes a qualitative threshold to ensure that the advantages of being a franchise are only available to businesses that have a track record and that start up franchises are not overwhelmed with regulatory requirements.

A franchise that has not operated the business format for at least 12 months, or which is operating less than four outlets, will not have to comply with the obligations imposed by the directive, but at the same time will not be able to enjoy some of the benefits that accrue to a franchisor under it.

Abell dismisses as ill-conceived and impractical the proposal made by a group of academics appointed by the EU Commission to re-engineer the EU’s regulatory environment for franchising by introducing EU-wide commercial code. He also dismisses as unhelpful, uninspiring, and unoriginal the draft franchise law published by UNIDROIT.

Instead he recommends that the new directive should enable franchisors to require pre-contractual disclosure by franchisees, focusing regulation only where it is required (by excluding fractional franchisees, small franchisees, sophisticated investors, large investors, large franchisees and insiders).

New rights for franchisors
Abell also advocates the removal of the suffocating impact of EU competition law, which he states to be contrary to both the recommendations of the OECD and the ‘per se’ approach advocated by the ‘Chicago School’ of anti-trust academics.

He does this by recommending that franchisees be allowed to compete on a level playing field with corporate chains by having the right to fix their franchisees’ retail prices, and control their e-commerce activities. In academic legal circles this is big, brave stuff.

Potential franchisees need to be better educated
In order to help ensure pre-contractual hygiene, and so prevent the mismatch of expectation that causes most disputes between franchisors and their franchisees, Abell recommends that potential franchisees should not only be given access to appropriate information before they enter into the franchise, but must also be equipped to interpret that information in an appropriate manner.

This means that potential franchisees must be educated out of the psychology of failure that encourages failed franchisees to blame others for their own failures. They must understand what they are committing themselves to when they buy a franchise and the need to take and follow appropriate expert professional advice.

Abell proposes that professional advisers, such as lawyers and accountants should be required to take short on-line franchise education courses if they are to advise potential franchisees and that potential franchisees investing more than £20,000 must produce a certificate from their advisers to prove that they have taken such advice .

New role for national franchise associations
Abell suggests that national franchise associations can play an important part in educating potential franchisees about what he calls “the facts of life” of franchising – namely that they have to work hard, follow the format, risk failure, and take and follow expert advice from appropriately experienced professionals.

He proposes that national franchise associations should be funded by central government and, instead of trying to regulate franchising, be concerned with promoting both best practice in franchising and the use of franchising in the EU.

Disclosure by franchisors
Mandatory pre-contractual disclosure by franchisors is recommended by Abell.

He suggests that this should be given in a set form 15 working days before execution or payment, covering details of the identity and experience of the franchisor, the franchise network, the terms of the franchise agreement, and any earning claims. It should be in plain language and contain an appropriate risk statement.

A copy of the franchise agreement in the form in which it is to be executed should accompany the disclosure document.

There should also be a five-day cooling off period after execution.

Failure to comply with the disclosure requirements should lead to the right for the franchisee and government authorities to terminate or claim damages within 12 months of the franchisee becoming aware of it, or 24 months of the date of execution, whichever is the later if it resulted in defective consent having been given. The regulatory authorities should be able to impose penalties, including disqualification. Electronic disclosure should be permitted.

There should be personal liability for any individual responsible for the disclosure document being inaccurate.

Those disclosure obligations should also apply to foreign franchisors with no presence in the relevant member state, who should be under an obligation to disclose relevant information about analogous markets.

Misleading and deceptive behaviour
Abell suggests that misleading and deceptive behaviour should be prohibited. Such behaviour comprises failing to comply with the pre-contractual disclosure obligations and making any statement which although literally true, misleads or deceives, and is or likely to mislead or deceive.

Due to the ever-changing nature of franchising and the impact of fast changing technology on the markets he proposes that there should be a regular review of the law every five years.

He is against any suggestion that franchise documentation should be registered on a public register due not only to the practical difficulties it would give rise to in the 27 EU member states, but also due to the cost of its effectiveness and the likelihood of it making any tangible contribution to accentuating the impact of the second commercial imperative on the EU’s legal systems.

Mandatory clauses
In order to re-enforce the economic drivers that attract both franchisors and franchisees to franchising and reduce the inherent consequential risk to an appropriate level, Abell recommends that franchise agreements have mandatory clauses imposed on them.

Franchisees must not challenge the franchisor’s intellectual property, the implementation of the business format, not compete with the franchisor during the term, and for a reasonable period thereafter allow the franchisor the right to purchase the franchisee’s business on termination, allow termination for cause without compensation, allow the franchisor pre-emptive right of purchase, impose a duty of confidentiality, and purchase tied goods and services from the franchisor or its nominated suppliers.

In return, the franchisor should have  mandatory obligations. It must be the owner of, or have the right to, licence the intellectual property rights on which the franchise is based, provide a reasonable level of training, refrain from encroachment, allow the franchisee the right to sell its business (subject to the franchisor’s pre-emptive right), and not supply goods or services to the franchisee at over-inflated prices or which are unfit for purpose.

Unconscionable behaviour
In order to take account of the franchise agreement’s long term and changing nature, Abell proposes that unconscionable behaviour must be prohibited.

Unconscionable conduct is conduct showing no regard for conscience, or that is irreconcilable with what is objectively right or reasonable, taking into account the best interests of the franchise network before those of individual franchisees and the franchisor.

In order to increase certainty, details of the grounds upon which unconscionability will be judged, and examples of what amounts to unconscionable conduct should be given in the directive.

Radical new approach
Abell says: “I am advocating an entirely new and radical approach to the regulation of franchising. Most jurisdictions fail to recognise the hugely positive impact that franchising can have on both businesses and national economies.

“Their laws impose far too much of a burden on franchisors. They do not actively encourage companies to use franchising as a route to market – a route that allows them to grow with a much lower capital requirement and without the need for complex and expensive human resource management structures and a route that allows them to access strongly incentivised, high quality management with a good knowledge of the local market.

“They use too much stick and not enough carrot. The regime that I am proposing actively promotes the use of franchising by companies so that it can fulfil its potential to contribute significantly to the EU’s economy.

“Particularly in these harsh economic times, the legal systems in the EU should be encouraging companies to expand across member state borders, rather than becoming barriers to economic growth,” Abell concludes.

Definitive work
The leading U.S. franchise lawyer and chair of the International Bar Association’s Franchising Committee, John Baer, is clear that Abell’s thesis is “a monumental and definitive work.”

Baer, a partner in the Chicago office of U.S. law firm, Greensfelder, Hemker & Gale states: “Dr. Mark Abell’s thesis is not only the leading contribution to the academic study of franchising in the EU, but the paper convincingly demonstrates how franchising has failed to fulfil its potential in the EU due in part to the regulatory environment, and calls for a re-engineering of that EU regulatory environment.

“This paper is a significant achievement; it is unusual for a leading practitioner to also have devoted the time and energy needed to produce a paper meeting the high standards of academia. This is a must read for the serious student of franchising in the EU,” says Baer.

The winners will be announced and presented with their accolades at the British & International Franchise Exhibition, the UK’s leading international franchise event, on March 16 and 17, at Olympia, London.

Judged by an independent panel of experts and supported by the British Franchise Association, the FMA recognise the industry’s most innovative and effective marketing campaigns. They reward organisations that have raised their public awareness and as a result have achieved sustainable growth.

This year’s award categories include: Best website; Best print advert; Best franchisee marketing support; Best online marketing campaign and Best overall marketing campaign.

Adrian Goodsell, franchise exhibitions manager at Venture Marketing Group commented: “The FMAs represent an opportunity for franchise businesses to gain recognition in the industry for their achievements and celebrate their hard work. Award winners have found the accolade invaluable for promoting their business on a national and regional level, as well as providing an opportunity to reward hard work and boost staff motivation.”

FMA information and criteria can be downloaded along with an award entry form at www.franchiseinfo.co.uk/awards/2012.

I had wanted to work for myself for years, but didn’t want to be in an office or shop-based business. Becoming a franchisee seemed the best way forward given all the research I had done, but choosing the right one seemed like a minefield. I had one lucky escape from a franchise I nearly signed up with that subsequently went bankrupt, leaving its franchisees high and dry.

Guidance and training
That incident illustrated the importance of finding the right franchise for me and I decided the business had to be a member of the British Franchise Association, as well as being established in its sector.

Autovaletdirect met this criteria and I bought the franchise in June, 2008. Under the guidance and scrutiny of an experienced franchisee, the training was very much on the job, and my impression of the team was that the people were friendly, very informative and provided great back-up and support when needed.

For the first few weeks I was constantly on the phone to one of my trainers. I found support and advice was always available, and still is.

The experience of the franchisor, Chris Johnson, is unrivalled and second   to none in my opinion. He has operated his own car valeting business, just like his franchisees, starting the business over 20 years ago. From his experience he has fine-tuned the service we are privileged  to offer our customers.

Spending so long in retail helped me adapt to my role as franchisee because I understood the importance of good service. The franchise is all about building a customer base and working hard to consistently exceed customer expectations, and from that base has come regular demand for the service.

The first few months took some getting used to. I went from receiving a regular four-weekly wage no matter what, to earning a living through my own efforts, self-motivation, and the guidance I received from the franchisor.

Although a large percentage of the work comes through our head office, building an establishing interest from the large audience of customers in my area requires ongoing marketing activity from pounding the pavement leafleting and using our call marketing system to utilising the internet through the proven IT system we are lucky to have as franchisees.

I have, for example, even attended a lucrative charity golf event in my area, offering a free valet as a raffle prize to raise my business profile.

Successes
Since I became an Autovaletdirect franchisee, there have been some great successes. One of them was signing a national car rental firm to use our services, and another was securing work locally from several large companies that now use me regularly for their company car fleets. On top of this, I have recently won a contract from a freight company to valet the cabins of 30 of its lorries every month.

The recent launch of Caravanbrite, lifetime guaranteed interior and exterior protection for the leisure industry, has also been a fantastic success. Introduced last year at the Caravan & Motorhome Show at the NEC, Birmingham, we anticipate huge success for this unique supply-and-apply service.

As an Autovaletdirect franchisee, I have attended several paid events, including corporate track days, golf and award events for Audi, and the Motor Show at ExCel in London where, along with the Autovaletdirect network, I looked after the Alfa Romeo stand. The highlight for me was looking after the Alfa Romeo relay cars at the World Super Bikes event at Silverstone in August, last year.

After three years as an Autovaletdirect franchisee, I’ve found that being my own boss is a world away from working as a retail store manager. It’s a decision I wish I had made sooner.

You know the buck stops with you, but there is nothing more satisfying than seeing your business grow from your own ability and effort.

For further details on the Autovaletdirect franchise, click here.

There are already 160 sites attracting more than threequarters of a million unique visitors a month and Northcliffe aims to become the leading community website network in the UK.

The franchise only costs a one-off investment starting at £6,995 plus VAT, depending on territory, and according to Northcliffe could earn an income of more than £5,000 a month.

The role of the franchisee is to manage the editorial content of the site, facilitating discussions and highlighting important issues to create an active online community, whilst profiting from display advertising, enhanced business listings, and providing digital marketing opportunities for local businesses to increase their sales and online presence.

Lee Williams, general manager of Northcliffe Digital, said: “Our franchise model means that we will be looking for experienced and committed individuals, who are passionate about their local area and can use their knowledge and relationships to run the sites. We believe that the new sites will thrive in the hands of local people who can manage content and crucially attract the right local advertisers.”

Northcliffe Digital has developed two market leading regional and local brands – thisis and localpeople. These brands, in conjunction with the group’s recruitment, motoring and property networks, are leading forces in the regional and local digital market, allowing their users to access content across a wide range of different genres.

For further information, please complete and send the form below.

Andrew Withers, (centre) managing director and owner of Southern Fried Chicken (SFC) and the two franchisees, brothers Azman (left) and Amir Ali, have invested a total of £50,000 to completely refurbish the premises. The Undercover Boss programme, which aired last July, had Withers make secret visits to his franchises throughout the country and it highlighted some particular challenges at the Tyneside outlet.

Amir and Azman have been in business together 13 years together and have been running their takeaway since 1998.

Azman Ali said: “It has been an interesting process. We’ve worked closely with Mr Withers and the SFC head office to ensure that we are at the forefront of what the company as a whole is trying to achieve. We’re really pleased with the results, including a brand new shop front, redecoration throughout, and tables with fixed seating. The new branding is really fresh and makes the shop look far more modern.”

Withers commented: “The Ali family were fantastically welcoming when I visited them during the show and it was great to go back to re-open the store, which looks fantastic. “I could always see the potential in the site. The fact we have been able to progress and work together has meant a lot to me personally.”

SFC is one of the UK’s fastest growing fast-food franchises, offering quality food, hearty portions, good service, a multi-choice menu and fair prices.It has launched its new look in over 30 countries worldwide and Withers continues to focus on UK development as he looks to launch 200 new stores over the next five years.

His father, Arthur Withers, trademarked the name ‘Southern Fried Chicken’ in 1983 following a period of work on a chicken farm in Norfolk and in Greenville, Carolina, where he came across the unique SFC recipe.

SFC differs from many of its competitors in that it prepares all its food freshly on the premises and does not use reconstituted chicken meat in any of its chicken products, supporting its lip licking slogan. All its chicken is also sourced in the UK.

SFC is part of the Fast Food Systems, which is the holding company of several well-known brands, such as Southern Fried Chicken, AJ’s Piri Piri, and Vizu equipment. FFS is a European leader in the supply and manufacture of commercial catering equipment.

Power, right, was one of Alan Sugar’s original apprentices in the 80s and founded Ecademy to offer support and networking groups for entrepreneurs and small business owners.

Another speaker will be Nicolas Holzherr whose subject will deal with choosing the right ideas, testing them, and developing them into a business on a shoestring budget.

Book your free tickets now (saving £15) at www.franchiseinfo.co.uk using promo code: FWFEB

The current association, the British Franchise Association (BFA) was formed 35 years ago in 1977 to promote and self-regulate the industry and has been unchallenged, although unsuccessful attempts  have been made from time to time to set up national bodies for franchisees. The BFA is currently engaged in an ambitious programme to embrace franchisees and has launched a section of its membership for the franchisees of its franchisors, called In-Franchising, and created three seats on its board for them.

Brian Smart, the BFA director-general, has pointed out to his members that the BFA is recognised by the UK government and the EC as the representative of the industry and for its work in establishing and promoting ethical franchising, and warned them that the arrival of another association would be harmful to the industry.

AFA support
The AFA has, however, been welcomed by Rik Hellewell (right), the founder and managing director of Ovenu, the global market leader in on-site oven cleaning.

A critic of the BFA’s franchisee engagement programme, Hellewell said that he was supporting the new association and intended to join it.

“The formation of an alternative association, which will be made up of franchisors only, sits well with my philosophy as I feel that the BFA is moving in the wrong direction. I believe this to be driven by the European Franchise Federation, despite rhetoric from the BFA to the contrary.

“There is nothing wrong in my view in having a choice of associations for franchisors to be members of either or both. Two voices are often louder than one and, should franchisors elect to have a foot in both camps, the sector as a whole could benefit enormously.

“An alternative franchise association has been in the minds of many people for a long time, and with the AFA offering membership for a quarter of the cost of that of the BFA, it will attract significant interest.”

The Manchester programme is being sponsored by the RBS Group, NESTA, the Association of Greater Manchester Authorities (AGMA) and Manchester’s New Economy. FranchisingWorks provides financial support to buy franchise licences for those successful candidates who are unable to cover the full cost themselves. When the new business becomes profitable, the franchisee then buys the licence from FranchisingWorks and repays the initial investment.

One of the latest successes is Andrew Hurley, of Oldham, who has taken a franchise with Snap-On Tools through this system. He was a business development manager for 10 years, but was made redundant in 2009. After various other short-term jobs and a 12-month period of unemployment, he was introduced to FranchisingWorks through his local Job Centre.

He recalls: “The initial workshop was very informative, and I valued the level of understanding and experience that the programme manager had in the franchise industry.

“The ongoing guidance and support was fantastic and the level of due diligence they carried out on both me and the franchise company I was interested in was second to none.

“Also the ability of FranchisingWorks to help me get access to funding made my business feasible.”

In another initiative, FranchisingWorks, which is part of the Shaftesbury Partnership, the social reform group, has joined a small consortium along with Blue Orchid, A4e and Business Finance North-West that has being appointed by the Royal British Legion (RBL) to deliver its Be the Boss programme for Armed Forces leavers across the country. This offers business start-up training, grants and loans up to £30,000 and mentoring to ex-Armed Forces personnel who are interested in starting up their own business.

Launching the RBL scheme at the Department of Business Innovation and Skills, Mark Prisk, MP, the Business Minister, said it would provide a means for many ex-service personnel whose employment options are limited by injury to become entrepreneurs. Service people faced distinctive difficulties in starting businesses, such as a lack of a network after a mobile career, and this is reflected in the low rate of self-employment in this group, which is just six per cent, he said.

His department was very grateful for the sterling work done by RBL. It had not previously been involved with enterprise as it was a charity, principally concerned with providing welfare services. “It is now very switched on to encouraging enterprise amongst its members,” he said.

Robert Dancy, the programme manager for FranchisingWorks in Greater Manchester, described its scheme at the Franchise Supplier Showcase, where Craig Henthorn, managing director of Caremark, reported that two of his franchisees who had opened at Oldham through the scheme were “very, very promising in their approach and attituded”.

The two are Melvin Lusty and David Corbett. Lusty bought and then sold Rainbow International, the carpet and upholstery cleaning and restoration franchise, and has since invested and worked in a number of franchises, including currently Chemex, the cleaning and hygiene manufacturing and distribution business of which he is   chairman.

Corbett is the co-founder and chairman of Signs Express, the computerised signwriting business, and the BFA’s board member for international affairs. He has been secretary and chairman of the European Franchise Federation.

The other two recipients are both service providers to franchisors, Penny Hopkinson and Gordon Patterson.

Hopkinson (pictured) is the founder and owner of Manual Writers International and the leading figure in the preparation of franchise operating manuals. She is a contributor to the BFA’s code of ethics and its members’ rule book.

Manuals that Hopkinson has written underpin the quality ethical standards for such clients as Costa Coffee, Prontaprint, Signs Express, Unigate Dairies and Wagamama.

Patterson has been a leading member of the franchise consultancy network of Franchise Development Services for 20 years and is a member of the BFA’s qualified professional panel which oversees its QFP qualification.

Rik Hellewell (pictured right), founder of Ovenu said: “With our latest internet statistics showing that over 2,000 visits in the first three weeks of December came via mobile devices, we’ve brought forward our plans and introduced our new-look mobile site earlier than anticipated.”

The new mobile site, www.ovenu.co.uk/mobile, makes it easy for browsers to locate their nearest oven valeting expert via the ‘Postcode locator’, and the National Freephone can be called using the modern ‘click to call’ facility.

Hellewell added: “With mobile devices growing in popularity and to remain comfortably at the forefront of our industry, making these changes to run in parallel with technological advances is the right thing to do. If and when statistics show a shift in trends, the modern day business needs to adopt a proactive approach and move with the times”.

QR code
Ovenu have also introduced their QR (Quick Recognition) code, (pictured right).

The QR code can be scanned with any modern hand-held mobile device and will quickly and effortlessly load the appropriate website or webpage designated by the code.

“The QR codes are appearing in all types of media and allow mobile devices to capture a website URL without the prospective browser having to remember a web address. Over the coming weeks and months we shall be incorporating our QR code into our media activity on both local and national levels. We have always embraced technological advances, and the introduction of our QR code, is just another example of our forward thinking ethos,” said Hellewell.

More than 1,000 franchisees have  been surveyed in the new Franchise Satisfaction Benchmark scheme of Smith & Henderson, the franchisee recruitment specialist, and over 30 franchisors entered its first Best Franchise Opportunities Awards.

The scheme is the first to enable  franchisors to advertise in their franchisee recruitment campaigns the opinions of their franchisees of their services as surveyed by an independent source.

The scheme has also been developed to encourage franchisors to adopt best franchise business practices.

“What makes us unique is that our findings are based purely on franchisee feedback,” says Steven Frost, a partner at Smith & Henderson.

Participating franchisors have ranged from the smaller firms through to the big brands such as O2, the mobile phone network and retailer.

Puddle Ducks, the franchise that provides swimming classes for babies and children, is among those who have received positive results. Tracy Townend, joint founder of the firm, said: “When we started franchising several years ago, we knew that one thing that would set us apart was the support we provide our franchisees.

“Until you do research like this you can only gauge your success by what franchisees tell you and gut feeling, but, of course, it is always so much more  reliable when it comes from a third party.

“The survey provided exactly that insight and the results were some of the best that we have seen. We hoped for results like this, but it is such a wonderful feeling to have it confirmed.

“Furthermore, we have gained valuable insight into the way we do things, and consequently have had some exciting ideas for the future, such as a franchisee leadership academy.

In today’s challenging economic environment, being at the top of your game has never been more important to attract more business. Armed with these results, we feel hugely energised and optimistic for the future,” said Townend.

Award winners
Puddle Ducks won best overall franchise in the Best Franchise Opportunities Awards run by Smith & Henderson.

The other winners were TaxAssist Accountants (best training and support), Home Instead Senior Care (best franchise system), Jasper’s Online (best growing franchisor with 8-14 franchisees), and Puddle Ducks (most recommended  franchise).

At the awards, seminars were presented by Smith & Henderson, the Franchising Training Centre, O2, the Alternative Board, Puddle Ducks, Home Instead Senior Care and Coconut Creatives.

Launching the new initiative at the Franchise Business Booster Conference & Supplier Showcase, Brian Duckett (pictured), chairman of the International Franchising Centre, said, “It is time UK franchisors realised the potential for exporting their business systems. Provided they proceed with caution and the right advice there is a world of opportunity out there, and it fits with the government’s aim of increasing exports and trading our way out of difficult times”.

Reading a statement from IFE organisers, Duckett told representatives from more than 50 franchisors: “After spending the last 20 plus years in the nation’s Capitol, the IFE is moving to the business capital of the world, the Big Apple, New York City and we have received an exemption from the State of New York, allowing non-registered international franchisors to exhibit without registering in New York to sell franchises”.

Over those 20 years the IFE has attracted tens of thousands of visitors to its events in Washington and they have been a significant catalyst to the global expansion of franchising.

The IFE is endorsed by the U.S. Department of Commerce and promoted worldwide as part of its International Buyers Program. More than 150 U.S. Embassies through their Foreign Commercial Service Offices actively promote the IFE within their regions and bring official escorted delegations from around the world. Last year there were 1,300 international visitors and 29 foreign delegations, representing more than 50 countries.

Another event, which is part of IFC’s new initiative, is the “Passport Through Europe” Global Master Franchise Forum in Venice on March 23 and 24.

Arranged by Franchise Pool International, a group of consultants and brokers which operates throughout Europe and of which IFC is the UK partner, this event gives franchisors from around the world the opportunity to learn about individual European franchise markets and to meet franchise brokers, representing qualified investors from more than 20 countries.

Duckett said: “With support from our consultants and UKTI, the door to the world is open to UK franchisors who have the vision and the drive to grow internationally – and weekends in New York and Venice never hurt anybody.”

Details of the “Introduction to the World” package, of which these two events form just a part, are available from info@thefranchisingcentre.com, or by calling 01904 561 598.

Features of the package include the following:

• One year’s inclusion on www.themasterfranchisecentre.com, the only website in the world dedicated to international franchise opportunities.
• Access to a proven system for dealing effectively with international enquiries.
• Delegate pass to the International Franchise Association Convention in Orlando, Florida, February 11-14.
• Delegate pass to the “Passport Through Europe” international franchise forum in Venice, Italy, March 22-24, where you will meet experienced franchise brokers, representing qualified investors from more than 20 countries
• Representation in the British Franchise Village at the International Franchise Exhibition (IFE) in New York, June 15-17, where your brand will be exposed to more than 1,000 buyers from over 50 countries

Two successful entrepreneurs are among the many industry experts set to share the secrets of their success at the Growing Your Own Business seminars at the National Franchise Exhibition taking place on 24th and 25th February 2012 at the NEC, Birmingham.

Thomas Power is delivering the keynote address at the National Franchise Exhibition called ‘Twitter can rule the world’. He was one of Alan Sugar’s original apprentices in the 1980s. Thomas is an internationally acclaimed speaker on digital media and coaches business people worldwide on how to ‘Go Social’ online. He also founded Ecademy offering business support and networking groups for entrepreneurs and small business owners.

Nicolas Holzherr will deliver an inspiring session called “Anyone can do it: Choosing the right ideas, testing them and developing them into a business on a shoestring budget.”

Since his graduation in 2009, Nicolas has founded three companies, QRky, which uses quick response technology to link digital contact and multimedia data to printed business cards; Recip.ly, which links recipe websites with online supermarkets; and Co-Go Coffee To Go, which sells high-quality, ethical takeaway coffee.

Growing Your Own Business is a valuable platform for inspiring entrepreneurs, business experts and suppliers from across the UK to share advice on how to build a successful business. The series of seminars is just one of the many features at the National Franchise Exhibition.

Another regular and popular feature at the exhibition is the Franchisee Panel where franchisees will relay their experience in making the transition from employee to franchisee as well as answer questions from visitors on the reality of developing a successful business.

The High Investment VIP Lounge is where visitors ready to invest substantially in franchises can find valuable conversations and network. Sponsored by Platinum Property Partners and United Carpets, the lounge is a great place to conduct meetings away from the bustle of the exhibition and has complimentary WiFi.

Visitors who are beginning their search for a franchise should head for the Franchise Starting Point. Here, industry experts, consultants, lawyers, bankers and franchisors can offer one to one advice and answer questions to enable visitors to make the most of their visit.

Exclusive to the National Franchise Exhibition are McDonald’s Franchisee Recruitment Open Days. Visitors can meet with McDonald’s team, gain a unique insight into one of the world’s biggest brands and find out if becoming a McDonald’s franchisee is right for them. Presentations take place at 11.00 and 14.00 on both days of the event and can be booked online at www.franchiseinfo.co.uk.

The Career Clinic has experts who can help visitors assess their career, benchmark their skills and look at what steps to take next. This feature is particularly useful for those who may have been made redundant, want to look at options that fit around family life or investigate a way of generating an income post retirement.

The National Franchise Exhibition also has an extensive conference where experts from the British Franchise Association (BFA), members from the legal and finance professions, business advisers, as well both franchisors and franchisees will provide a fundamental grounding in franchising. They will present on where to start, who to talk to, where to find advice, and what franchises suits different requirements.

Conference themes include high-level investment franchising, franchise resales, executives in franchising, families in franchising and hands-on franchising.

There are also many franchise businesses exhibiting companies at the event covering a wide variety of sectors such as automotive, property, travel, retail and food and drink. They can suit every budget and lifestyle and include Big Little Sweet Shop, Cash Generator, Daily Poppins, Lawnhopper, McDonald’s, Stumpbusters and Totally Clean Solutions.

The event is exclusively supported by the BFA and only companies that have met the Association’s code of ethics can exhibit. This means visitors can have confidence in the franchise opportunities on offer, as they are an ethical entity within the UK market.

There is also another opportunity to investigate franchise businesses at a major international event in March. The British & International Franchise Exhibition takes place on 16th and 17th March at Olympia, London.

To register for the National Franchise Exhibition call +44 (0)844 257 8668 or visit www.franchiseinfo.co.uk. Callers can purchase tickets by credit card for £10 each or £8 each for two or more in advance. Admission on the door is £15.

Visitors can however gain free admission to the exhibition using the promotional code FWFEBED at www.franchiseinfo.co.uk.

For the latest news and updates, follow the exhibition on Twitter at www.twitter.com/ukfranchising, join the Franchise Exhibitions Group on LinkedIn or become a fan of the FranchiseInfo group on Facebook.

There are an estimated 55,000 student businesses in Britain in sectors as diverse as design, IT, catering and media. To launch the initiative, Lloyds has joined forces with the National Consortium of University Entrepreneurs (NACUE), a charity that encourages entrepreneurial activity in universities.

The Best Enterprise Award will receive £50,000 and the Best Start-up Award, £10,000. Both will also have two-years mentoring from senior Lloyds representatives and a business session with a Lloyds executive.

Entrepreneurs who studied at universities, who have graduated in the past five years and have been trading for more than a year, will be able to enter the awards by visiting www.lloydstsb.com/enterpriseawards.

The initial heats will be in February across six regions in England, as well as in Scotland and Wales. The two winners in each heat will compete for the two top awards in March.

Announcing the scheme, John Maltby (pictured), group director, commercial, of Lloyds Banking Group, said: “Britain has a proud history of enterprise, and for generations our universities have played a fundamental role in nurturing business talent. We want to ensure that this does not go unrecognised, and to play our part in nurturing and supporting entrepreneurs to give them the best chance of future growth.”

Mark Prisk MP, the Business and Enterprise Minister, commented: “The Government wants to grow the next generation of entrepreneurs by ensuring that young people get hands-on experience of enterprise at college and university. I encourage students and graduates to take part.”

Hushpreet Dhaliwal, chief executive of NACUE, said: “Our universities are home to a huge number of emerging enterprises. With the right guidance and support, these businesses could so easily be the success stories of tomorrow. We’re delighted to be working with Lloyds, which is playing a leading role in nurturing enterprise, and the awards are another example of its commitment to help businesses grow.”

Emma-Jayne Parkes, who with Viviane Jaeger founded a designer brand of colour-changing products, such as umbrellas and shower curtains, said: “Our business was born at university and we know from experience how valuable the university environment can be to entrepreneurs. There are many thousands of start-up businesses at universities, but the real issue is the path they take after graduation. Awards such as these can play a huge role in encouraging entrepreneurs to progress their ideas and build their business.”

Since launching its SME charter in 2010, Lloyds has supported more than 200,000 start-ups. During the first nine months of last year, the group provided £32bn of committed gross lending to UK businesses of which £9.6bn was to SMEs.

The five franchisors elected to the BFA board at its annual meeting at the Hyatt Regency, Birmingham, in December were Sean Derrig (Chemex International), Dan Archer (Home Instead Senior Care), Pam Bader (Molly Maid), Clive Houlston (Mr. Electric) and Steve Calvert (Safeclean).

They have joined six franchisors who continue their term: Mike Goddard (Belvoir Lettings), Michael Eyre (Blazes), Kelly Chambers (Dream Doors, pictured), Alistair Wiggins (Pirtek), Mark Llewellyn (Revive! Auto Innovations), and Berkeley Harris (Western Provident Association).

Others on the board are: representing the associates, Jat Mann (PC Pal); and representing the affiliates, Derrick Simpson (Franchise Resales), Brian Duckett (the Franchising Centre), and Jane Masih (Owen White, the legal member).

Also on the board are Brian Smart (director-general) and as co-opted members, two franchisees Ken Bevis (Signs Express) and Justin Brookes (Mail Boxes Etc.).

A third co-opted franchisee is expected to be announced shortly, which will bring the board total to 19. In future, the three franchisees will be voted onto the board when franchisees have a sufficient number within the BFA membership.

The five forum chairmen elected were: affiliates forum, Shirley Hughes (Franchise Careers Centre); London forum, Duncan Berry (Choice Hotels Europe); Midlands forum, Jonathan Mills (Premier Sport); Northern forum, Simon Bartholomew (Oscar Pet Foods); and South-West forum, Phil Gaffer (BCR Associates).

At the first board meeting following the annual meeting, Kelly Chambers was elected deputy chairman.

Leah, who played Tina McQueen in the Channel 4 soap and is currently filming a major new BBC drama, held a masterclass at the new LIPA 4:19 academy in Knutsford – the stage school franchise of the prestigious Liverpool Institute for Performing Arts (LIPA).

A LIPA graduate herself, Leah led an acting workshop and then answered questions about her career and time on Hollyoaks.

Based at Knutsford Methodist Church, LIPA 4:19 offers curriculum-based classes in singing, dancing and acting for children aged between four and 19. The academy was launched in September by Alison Gorton and Becci Francis, who have previously worked for LIPA 4:19 at its LIPA base.

Leah Hackett said: “I have fantastic memories of my time at LIPA and everything I learned there has really helped me in my career. When Becci and Alison asked if I would lead a class, I didn’t hesitate in saying yes and had great fun with the students sharing my own experiences of working in television.”

Alison Gorton, co-principal of LIPA 4:19 Knutsford, added: “Leah’s success is proof of the benefits of quality performing arts training and our students were very excited to have her here.

“Masterclasses provide great insights and it can be very inspiring to receive tips and advice from someone like Leah who has gone on to forge a successful career in the business. We’re looking to develop our series of masterclasses in 2012.”

Leah received a BA (Hons) degree in acting from LIPA in 2006 and has appeared in Doctors, The Case and the Liverpool Nativity. She is currently filming new BBC drama Savage, which will be aired in 2012.

The ex London Irish rugby player signed the contract on The Colmans bar in Great Coleman Street.

The bar will remain open in its present format throughout the Christmas festivities and following major investment, will reopen as Bar Sport, the latest addition to the sports bar franchise chain.

When opened, the American style sports bar will feature authentic sports memorabilia and sport fans can enjoy their favourite game on one of the 25 high definition screens.

Having played county football, rugby for London Irish and cricket for Essex, Micky (left) said that sport has always played an important role in his life: “Sport has always been my passion and It has always been my ambition to run my own bar. Combining the two is like a dream come true”.

Commenting on the refurbishment plans, national franchise manager for Bar Sport, Paul Grieve said: “We all know that pubs and other venues are having a tough time. To be successful, you have to be offering the public more than just food and drink. The reaction to Bar Sport elsewhere shows that we have a winning formula.

“We offer fun, sporting excitement and good food and drink in a great environment.

“We are in no doubt that Micky will make a great success of Bar Sport in Ipswich. He is brimming with ideas and his enthusiasm is exactly what we are looking for to drive the Bar Sport brand nationally.”

The new look sports bar will be unveiled in the new year with a glittering VIP evening where several top sporting names will help to celebrate the transformation.

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In the first six months of usage the centre has used 2,507 less units of water, which equates to a saving of £3,098, or the equivalent of more than £6,000 a year. Even the most efficient urinals use 1,000 litres of water a week, costing around £150 a year, but the majority are poorly set-up increasing this cost to £500 a year.

Chemex is supplying the leisure centre with biological cleaning devices, which drop into gents urinals that drastically reduces water usage. The devices use natural bacteria and enzymes to keep urinals smell free and blockage free, eliminating flushing needs. They are also completely ‘green’ as they harness nature’s technology rather than traditional harsh, carbon intensive chemicals.

The pool is operated on behalf of Cardiff City Council by Parkwood Leisure – one of the UK’s leading leisure management companies with a portfolio of more than 80 facilities.

John de Maid (left), general manager of Cardiff International Pool, said: “To shave £6,000 a year off one utility bill is pretty impressive. It is saving money as well as helping the environment by reducing demand for water.

“As a company we are constantly looking at providing best value for our clients and this device from Chemex has provided a simple way to save money without reducing service levels. All venues providing toilet facilities for large numbers of people should consider this device especially in the current difficult economic climate.”

The device has also attracted the attention of professional football clubs and is currently in use at Premier League club Stoke City’s Britannia Stadium.

Sean Derrig, scientific director of Chemex, said in addition to sporting and leisure venues, the device was also saving money for hotels, restaurants, pubs, schools and colleges.
“It’s not just big businesses that can benefit but smaller ones too. The whole thing works through natural enzymes and there is no need for any plumbing changes, simply drop the block and cage into the urinal and start saving water and money,” added Derrig.

Richard Clark, a former trading standards officer, who has operated the Ashford Ovenu franchise for over a year and a half joined the council operated ‘Buy With Confidence’ scheme in order to help reassure local clients that he is a trader that can be trusted.

The scheme exists to help and protect residents by providing a directory of legitimate and approved traders. It also aims to increase customer confidence, especially for vulnerable and elderly people who want to remain safe and independent in their own homes.

Ovenu technicians use a unique and thorough valeting process which involves dismantling key components of an oven. Importantly the process is environmentally friendly and involves no toxic chemicals or fumes.

Sharon Salisbury, project officer for Buy with Confidence, said: “The scheme has been introduced by Kent Trading Standards in order to provide consumers with details of reliable local businesses and trades people who carry out work around consumers’ homes and gardens. The businesses are checked by Trading Standards Officers for trustworthiness and compliance with consumer protection laws.

“The ‘Buy with Confidence’ scheme will encourage Kent residents to use tried and tested reputable traders, putting a stop to the activities of rip-off merchants and cowboys.”

Clark said: “I am pleased to continue to be a member of the ‘Buy With Confidence’ scheme. As a former trading standards officer I believe it is important to ensure businesses are screened and local residents are able to make educated choices about who they do business with in their local area.

“Whilst the scheme has been successful in the local area, providing peace of mind for customers, it is rewarding to be recognised for providing a high level of commitment to fair trading and a quality service to my clients,” he added.

The banks are to provide £150,000 of sponsorship finance to FranchisingWorks, which is being piloted in Greater Manchester. The programme’s core aim is to reduce unemployment by creating new businesses and jobs through franchising.

FranchisingWorks is part of the Shaftesbury Partnership, a social reform organisation, and was launched in Manchester earlier this year. The  programme is backed by NESTA, the Association of Greater Manchester Authorities (AGMA) and Manchester’s New Economy.

During the course of the next eight months, the pilot aims to provide 50 unemployed local residents with the opportunity to become a self-employed franchisee. Each candidate accepted on the programme will go through structured training designed to equip them with the key business skills to run a franchise.

FranchisingWorks also provides financial support to buy franchise licences for those successful candidates who are unable to cover the full cost themselves. When the new business becomes profitable, the franchisee can buy the licence from FranchisingWorks and repay the initial investment.

One of the first candidates to complete the programme has been Colin Hughes, who was made redundant last year after a 25-year career in various corporate roles. With FranchisingWorks’ support and training, Hughes has started his franchise business with VIP Bin Cleaning, providing a wheelie bin cleaning service for domestic and commercial customers in South Manchester.

Sean Forster, who covers the Watford area, has completed the rigorous training course and is now a Microsoft certified professional and CompTIA A+ certified for hardware.

“It is a risk for people in this day and age to have their computer looked at because it often contains very personal and sensitive data which could lead to identity theft or fraud,” explained Forster.

“It is so important that people make sure they know who they are inviting into their home or workplace. PC Pal only use insured, qualified and CRB vetted engineers to work to strict ethical standards to protect customers.

“Most problems can be fixed on the spot in the customer’s home or office, which reduces the inconvenience of them having to remove the PC to another location,” said Forster.

Redundancy
He had a background in IT before joining the franchise. He had been a software developer but was made redundant. He struggled to find employment in IT so he became a delivery driver for an online company. In his spare time he studied for various IT qualifications and helped family and friends with computer problems.

His ambition was to get back into the industry and after some encouragement from family and friends he decided to join PC Pal. This route gave him the added security as being part of a franchised network.

The franchise offers a range of services from repairs to removal of viruses, help with setting-up a computer and broadband/wireless issues. The franchise package starts at £19,999 plus VAT.

The meeting was organised by the BFA with the support of Caroline Dinenage, MP for Gosport.

Brian Smart, BFA director-general said: “Franchising has developed into an important industry encompassing small operations run from home, through to large retail outlets, professional services and even international hotel chains. Its stability and success rate mean that it can provide an ideal route for many to start their own business and take control of their future.”

Delighted by the positive response from MPs, Smart added: “ There is a real hunger by our MPs to capitalise on what is a sustainable, proven and low risk option for many. Our goal now is to work with our MPs to help open up information and advice to many more people that may at the moment be struggling to know where to turn.”

Caroline Dinenage said she too was delighted that the event was able to highlight the economic importance of franchising to so many MPs. “With significantly better success rates than other businesses, the franchise industry is key to promoting job creation, economic growth and an entrepreneurial culture. MPs will now be in a position to encourage this fantastic business model in their own constituencies,” she added.

The BFA is now looking to establish an environment with MPs from across the UK to build a regular two-way exchange of ideas, education, advice and support.

Pictured from left: Sir Bernard Ingham (president of the BFA), Caroline Dinenage MP, Michael Eyre (chairman of the BFA) and Brian Smart.

“We believe that many franchisors don’t understand how to get the best from their collateral and we can help them to do just that.”

Most franchises grow their businesses through the acquisition of franchisees and driving brand recognition with good marketing strategy. They put in systems that seem to take care of things and then enjoy a profit that ensues as the franchise revenues and perhaps other revenues come flowing in. But is that all there is to it?

The relationship between the franchisor and franchisee, and indeed any other company contracting in a similar way, is that of licensor and licensee. The franchisor collects fees and royalties for the use of the brand and its support.

Heather continues: “These revenues are, more often than not, self-reported by the licensee and research has shown that 80 to 90 per cent under-report. How can a franchisor therefore be confident that the correct amounts are being paid from all sources?”

It has to be said that errors leading to under-reporting are, in the majority of cases, accidental or process related. However, the same reasons continually arise as, for example, sales may not be fully recorded, or discounts and royalty rates may not be correctly calculated.

These problems can arise whatever the size of the franchise and they will certainly have detrimental financial implications for the business. Heather  can offer a solution: “We recommend that compliance programmes are instigated for each revenue stream of this nature and that they are monitored on a regular basis. This will have the effect of reducing under-reporting and increasing the amounts coming into the franchise coffers – often by significant amounts.”

Heather founded Blue Concept in 2008 to offer IP and licensing audit services so that her clients could fully realise the potential of their licenses. Her team has extensive experience in many sectors and Blue Concept is a leading provider with some of the biggest and well-known brands in the world as clients.

“But we do have many SMEs as well and it’s particularly rewarding to see how we can help them achieve real success with their brands. This is why we see the franchise sector as being a very important part of our own growth,” she says.

Accurate audit
Whether or not a franchisor has revenue monitoring in place it will still be reliant upon the franchisee’s or the licensee’s own processes. To all intents and purposes this is done behind closed doors. Blue Concept’s approach is to open these doors and obtain the information required for an accurate audit.

Heather is reassuring on this point: “We are a very personable, flexible team and our ethos is to be very agile so as to cover most situations, but at the same time non-confrontational. Standing outside both licensor and licensee we can cast a clinical eye over the processes in operation and where necessary offer mediation. All this enables us to achieve the optimum results on a continuing basis for our clients.”

Blue Concept is a young company but its name is becoming increasingly known in the world of licensing. They work on the lean principle and so are able to offer their services in a very cost effective way without compromising on the quality of the results. So even if a client already has a licensing audit programme in place Blue Concept will guarantee to save costs in this area as well.

The company’s full IP and licensing service can help clients in every stage of development – from start-up when just considering the suitability of a brand for licensing through the setting up of a licensing programme to the audit and royalty monitoring of established licenses.

Contacting Blue Concept means that the client is speaking with IP professionals who have worked with IP, brands, licensing and royalties in businesses at all levels.

“We are so confident that we can help,” Heather continues “that we offer every prospective client a free no-obligation licensing health check. This consists of a two-hour meeting from which we write an evaluation report, plus a recommended action plan. The client can take these documents and use them as it wishes, but hopefully it will see that value in what we have done, and continue with Blue Concept.”

Heather Lycett and Blue Concept can be contacted on +44 (0)20 3397 2888, enquiries@blueconcept.co.uk or visit www.blueconcept.co.uk for more information.

This problem was solved by taking a mortgage on their house and buying the Exeter resale franchise of Riverford Organic, the veg box distributor, of which they had been a customer in London, for Matt to start his own business.

He explains how they came to make this career-changing move.

“In Devon, life was good for about a year,” says Falkner. “I took over the childcare and spent a lot of quality time with my daughter. Then I started to feel the need to do something more with my career. Jane knew I was thinking about running my own business, but we’d never talked about investing in a franchise.

“Jane was actually looking on Riverford’s site to order a veg box when she stumbled across the franchising section.

From customer to investor
“We’d been Riverford customers in London, and used their veg box delivery service for years, so finding out about the opportunity right then was fortuitous. I was genuinely excited about the chance to run my own organic food business, and got in touch with head office. At the time, the nearest franchise for sale was at Exeter – an established territory with 1,800 active customers – and we decided to invest in it.

“We financed the business through some savings and a mortgage on our house, which we’d owned outright, so using existing capital and debt was another big decision we had to make.

“On top of that, I discovered that buying a business from a previous franchisee is more complex than investing in a virgin territory because there are more people involved, and there’s more due diligence required.

“On the plus side, you have a ready-made business that’s already generating revenue and profit through its existing customer base, and when all the paperwork has been sorted out you’re making money from day one.

Fresh furrows
“Since becoming a Riverford franchisee, I’ve had to adapt to a completely different outlook on work and life,” continues Falkner. “As an employee I had a single fixed role in somebody else’s organisation, but now I’m everything to the success of my own business. Every decision is mine and I have to deal with the outcome, whatever it is. As an employee you wear a single hat, but running a business means you wear a number of hats – you’re part accountant, part marketer, part IT and part logistics – there’s a lot to take on board.

“It’s impossible to know exactly how making such a key life change will impact on you, but talking to Riverford’s team in the early stages certainly helped prepare me for the gear shifts from employment to unemployment, and child minding to purchasing and running a fully-established veg box delivery business, Riverford’s staff have been on hand to give me advice when I’ve needed it most. Now I’m through that period, my focus is 100 percent on growing the business.

Marketing for growth
“I’ve been spending a lot of time on customer service to ensure a transparent transition. I’m also organising advertising and marketing campaigns, pushing sales and targeting businesses in the area. I’m already at the stage where I’m looking to bring somebody into the office on a part-time basis to take care of admin and handle calls so I can focus on increasing sales and getting new customers.

“What’s useful is that the other franchisees I speak to, who have got much more experience than me when it comes to knowing which advertising channels work best, give me help and tips to make sure I won’t waste money trying things out. If they tell me that something doesn’t work, I won’t do it. It’s another benefit of being in a franchise network.

Harvesting customers
“To grow this business you really need to get out and do as many shows as possible. It’s fortunate that I enjoy them. They allow me to gain visibility at the local level and push the brand from the front. My predecessor wasn’t attending shows, so I knew there was an area where I could improve on growth and profitability straightaway.

“In a year’s time I’d like to be up three to five per cent on year one, which I think is realistic. Anything above that will be a bonus. Every time you sign somebody new, it’s a real buzz. I aim to get 1,000 new customers in the next year, so if I do 30 shows and acquire 30 people at each, I’ll have almost achieved it and, of course, not all new customers will come from shows, which is even more positive.

“I’m now ready to build on the foundations I’ve got, which means making sure my existing customers are happy, while also working hard to get new ones. We’re making around 800 deliveries a week, which increased at Christmas.

“Being a Riverford franchisee is hard work, but satisfying. I’m working for myself, and I’m my own boss, but I still have the support of an established and recognised network with a wealth of experience, and a strong stance on ethics. I look forward to my new investment coming to fruition,” says Falkner.

Under the agreement, introduced in 2009 in its tenanted and leased estate, Marston’s is responsible for the retail offer, including the drink brands, food menus and retail standards. The franchisee will earn a percentage of revenue and be responsible for staff costs, while the other costs will fall on Marston’s. The benefits to customers are said to include improved standards and consistent value for money offers.

The group plans to convert 600 of its tenanted pubs to the agreement by the end of 2013. Around 230 have been converted to date with encouraging results.

The average expenditure per conversion is around £50,000 and the minimum target return on the incremental capital expenditure is put at 20 per cent.

Ralph Findlay, Marston’s chief executive, said that the agreement encouraged entrepreneurship among licensees, enabling them to manage successful businesses with the benefit of the company’s support, economies of scale, and retailing experience.

“The number of applicants for the agreement is three times higher than those for a traditional tenancy with 30 per cent of the applicants coming from outside the industry,” he added.

It lists more than 1,300 franchises now trading in Britain, and includes articles by the leading franchise specialists in business consultancy, the law and the banks.

To make it easy for readers to draw up a short list of franchises they would like to consider, the directory lists them by trade category and alphabetically.

In addition to the advisory articles explaining every aspect of the franchise system, the directory contains specimen franchise contracts (including a master franchise agreement).

The foreword is by Sir Bernard Ingham, president of the BFA. Now in its 28th year, the directory is the most authoritative in its field.

To order click here.

Amongst 14 exceptional finalists, the Gold Award winning pair provide a wide range of one-to-one, tailor made, services and home visits for the elderly. They were praised for their commitment to providing high quality care in an industry where some businesses have caused criticism over standards. The judges noted their passion for tackling this serious issue and spearheading an initiative which sees Home Instead Senior Care working closely with the NHS with the aim of raising healthcare standards across the country.

Also celebrating wins for their efforts were:

• Silver Award – Afia Sirkhot, McDonald’s (Birmingham & Dudley). Afia was praised for her dedication to training and developing high quality staff and working with the Birmingham and Dudley communities to build two hugely successful McDonald’s franchises.
• Bronze Award – Ian Cain, NBC Bird and Pest Solutions (Edinburgh). Ian was awarded in recognition of his commitment to ethical business and environmentally responsible wildlife management and for building relationships with, and retaining, a portfolio of high end customers across Scotland.

Mike and Catharine Chalton commented on their achievement: “Winning this award is fantastic recognition of the lengths our whole team has gone to to make a positive change in the community we live in. To be named as the 2011 bfa HSBC Franchisees of the Year is a great honour and a very exciting reward for everyone at Home Instead Senior Care. We are extremely proud of this achievement which also helps to raise awareness of the company and its vision to change the face of elderly care in the UK.”

Home Instead Senior Care is the fifth largest care provider in the UK. It is part of a growing worldwide organisation, Home Instead Worldwide, which currently has over 900 franchised offices worldwide, with over 100 in the UK and Ireland.

Cathryn Hayes, head of franchising, HSBC, commented: “It was a pleasure to witness so many enterprising businesspeople who are excelling through planning, perseverance, innovation and creativity. Mike and Catharine’s passion for providing excellent customer service came across strongly and it is great to see how it has resulted in their successful business going from strength to strength. They are a true credit to the franchising industry and an inspiration to small businesses across the UK.”

Seán Hammond, head of franchising, Express Newspapers, stated: “These Awards continue to reveal the business talent we host in the UK. Their success stories provide food for thought to existing and potential franchisees, and I congratulate every finalist on their enormous achievement.”

Brian Smart, director general, British Franchise Association (bfa), said: “There were so many strong stories this year, revealing the small businesses which have truly taken advantage of the franchise model to deliver success.

“We are thrilled to announce the winners of the 2011 BFA HSBC Franchisee of the Year Awards and are particularly pleased to see the level of commitment the winning franchisees have placed on supporting their communities and adapting their businesses to reflect the challenges of the economic environment.”

Along with the overall Gold, Silver and Bronze Award winners, five regional winners were selected.

Regional winners:
London and the South East
Asad Hamir, Amar Radia and Adarsh Radia, O2 (London W1)

Scotland
Ian Cain, NBC Bird and Pest Control (Edinburgh)

The Midlands
Afia Sirkhot, McDonald’s (Birmingham and Dudley)

The North
Mike and Catherine Chalton, Home Instead Senior Care (Moreton, Wirral)

The South West and Wales
Lorraine Thompson, Driver Hire (Oxford)

A well-established and proven business-format franchise should provide:-

•     An established market for the franchisor’s products or services.
•     Proven sales, marketing and operational procedures.
•     The benefit of an established business name.
•     Training, ongoing support and help in running the business.
•     Where appropriate, help in finding, fitting out and furnishing premises.

In this article, I shall look at the two sides of the franchise relationship – that of the franchisor and franchisee. To be successful, both need to benefit from the relationship.

Franchising from the franchisor’s perspective
Franchising has grown steadily in the UK over the last decade and is now present in almost all business sectors, especially the fast-food and service industries. With many well-known companies operating successful franchise networks, you may be attracted to the idea yourself. It could be the ideal way to expand your business without the huge capital investment needed to set up a wholly-owned operation.

As a franchisor, you grant a licence to local operators (franchisees) to sell your products or services, trade under your name and use any of your trade marks and logos for a specific period. The franchisees have a personal stake in the business and own their outlets so you can expect them to be more motivated to maximise sales than salaried managers. However, you specify exactly how your franchisee must operate in strict compliance with your business style.

You may be involved in substantial expenditure at the outset to develop your franchise operation, but when it comes to the stage at which you are appointing your franchisees they will pay you an nitial fee that will over time help to reimburse these costs. When they are up and running, you will receive a regular income from them by charging a management service fee, or marking-up the price of goods you supply.

At first glance, it may seem too good to be true, but as well as benefits, franchising can have its drawbacks. The development of a successful franchise network requires careful planning, continuous monitoring, and advice and support from professionals, such as a franchise consultant, accountant, franchise lawyer and, of course, your bank manager.

So why are banks interested in attracting franchise business? We see lending to a franchisee as much less risky than lending to someone starting a business entirely on their own. This, however, is only true of well set-up, sound and ethical franchises, and unfortunately not every business calling itself a franchise can claim to be that.

Franchising is not the path to salvation for an ailing business and even when it is done properly by a successful business it may take some years to achieve a positive cash-flow and worthwhile profits.
This article offers a brief overview of the aspects a business needs to consider when expanding through franchising.

What is franchising?
Franchising is a “joint venture” between an independent person (the franchisee) and a business (the franchisor) which wishes to expand its activities.

The venture is governed by a contract. This gives the franchisee the right to operate using the franchisor’s trade name/trade mark, in accordance with a business-format or “blueprint”. All aspects of the franchisee’s business are strictly controlled including image, products or service, systems, and administration. This method is usually known as business-format franchising.

As a franchisor you will:-

•     Allow franchisees to use your trading names, logos, business style and format.
•     Help franchisees establish their own businesses to a pre-determined format.
•     Provide continuing support to enable franchisees to operate and develop their businesses successfully.

You can only become a successful franchisor if you yourself are already operating a successful business with a good track record, and have sufficient management and financial resources to develop and support a franchise network.

The advantages

•     You can achieve rapid business growth without large-scale capital investment because each franchise operation is self-financing.
•     You can quickly create a number of outlets to distribute your products or supply your services.
•     You need only a small central organisation with a few highly skilled staff. This keeps your overheads to a minimum, allowing you to maximise profits. It also reduces the amount of time and effort you spend on staffing and administration – leaving you free to concentrate on developing the business.
•     Franchisees invest their own money in their operations, so they are likely to be highly motivated, and keen to minimise costs and maximise sales.
•     Franchisees may have considerable local knowledge and involvement in local community life, which is likely to be advantageous to the business.
•     Franchisees are responsible for financing and maintaining their units.

The disadvantages

•     Developing a franchise network can be expensive at the outset, both in terms of management time and capital outlay.
•     Your investment cannot be recovered until franchisees are appointed and you receive initial fees and then a regular income from them.
•     You receive only a part of the profit made by the outlet, instead of all the profit if they were owned by you.
•     Some franchisees may try to reduce the amount they pay in management service fees by not disclosing all their income.
•     To protect your income and your company’s reputation you need to monitor not just the sales performance of each franchisee, but also their quality standards. It is not always easy to enforce contract terms relating to dress, decor and marketing methods.
•     Some franchisees may try to change the style and direction of your business.
•     Franchisees will gain in-depth knowledge of your business and some may subsequently try to use it to set up as competitors.
•     You must be sure that the people you select as franchisees can accept the responsibility and stress of running a business.
•     Franchisees cannot be treated like managers as they are independent business people in their own right. Communication and people management skills are, therefore, vital.

Where to start
The first step is to find out more about franchising and see how you can use the experiences of others to avoid mistakes. Contact the BFA, buy its excellent franchisor information pack, and visit a franchise exhibition and attend the free seminars. Also consider attending a franchisor seminar run by the BFA. Think about appointing a franchise consultant to help you put your franchise operation together. We recommend you use a BFA-affiliated consultant, speaking to two or more to ensure you chose the right one for your business.

The next big step is to set up one or more pilot operations – a vital ingredient in creating a franchise that will have a long-term future. The benefits of the pilot units are:-

•     They will demonstrate whether the business is viable on a stand-alone basis
•     Enable you to identify any problems, and rectify them. Franchisees, who have parted with their hard-earned savings to buy your franchise, expect to receive a tried and tested format in which any difficulties and problems have been ironed out.
•     Enable you to put a comprehensive operations manual together. This will be one of the methods of ensuring that franchisees follow your systems and procedures.
•     They will give you a better idea of how much the setting-up costs for the business will be, what sales are required for break-even, and what level of profits franchisees may expect, and so on.

The franchise agreement
We strongly recommend you use a BFA-affiliated specialist franchise lawyer to draw up your legal contract. This important document will set out the terms under which you are selling the franchise, your obligations, and those of the franchisee. It must accurately reflect the promises you have made in your franchise prospectus and marketing material, and it should be fair, whilst at the same time ensuring that the controls that are necessary to protect both you and the franchisee are in place.

Preparing for launch
When the pilot is running successfully, you will be ready to prepare for the launch of the franchise. These are some of the things you will need to do:-

•     Prepare a prospectus to attract suitable franchisees. This should give clear, concise and accurate information about your business and promote a strong company image. It is a good idea to get your lawyer to check what you are saying to ensure you are not making unsubstantiated or unsupported claims which could lead to problems in the future.
•     Draw up a comprehensive training programme for your franchisees and, if appropriate, include practical experience for them in one or two of your outlets.
•     If necessary, establish sales areas or territories for each franchisee. Again, check with your lawyer to ensure that you are complying with competition legislation.
•     Decide how to calculate the initial franchise fee, management services fees, advertising fees, mark-ups and any other payments that the franchisees will be making.
•     You may need to prepare projected cash-flow forecasts and profit projections, based on your pilot operations, taking care not to promise that franchisees will reach specific profit figures.
•     Prepare a comprehensive operations manual, covering all aspects of the day-to-day operation of the business.
•     Consider applying to join the BFA. It has established a code of business conduct for its franchisor members that they must adhere to, and is a source of information for both prospective franchisees and franchisors.

Recruitment
The selection of suitable franchisees is absolutely vital. You must ensure you recruit people with the right skills and attitudes to join your network. The reputation of your business and the future of your franchise network could be at stake.

One of the most common mistakes a new franchisor makes is to take on franchisees in the early stages, who do not really have the skills required, or sufficient capital. When you launch your franchise, you will be keen to get things moving as quickly as possible, and to start recouping some of your initial outlay. Do not, however, be tempted to lower your standards as this will lead to problems in the longer term.

Popular recruitment methods include leads from your own website, exhibiting at franchise shows, advertising in the national and regional press, as well as on specialist websites, and in franchise magazines and trade magazines covering your particular business sector – a mix of all, or several of these. You should carefully consider what are the essential skills a franchisee in your network will require and plan your interviewing/vetting procedures to ensure that candidates have these skills.

Beware of letting a third party recruit franchisees on your behalf on a commission basis. They may not necessarily be the best judge of the right person for your network, and if they are paid for each one they sign you could find yourself recruiting in quantity rather than quality.

Franchisee finance
Depending on the start-up costs, franchisees will probably need to borrow to buy into your franchise and will have to put in some cash as well. In the early days banks will probably lend around 50 per cent of the costs, but when the network is well established with a good track record they may be able to borrow up to two-thirds of the costs.

By providing the banks with information about your franchise network, they can begin to build up a profile of your franchise. This is used to support lending managers when they are considering a request for finance from one of your franchisees, and means that the managers will have a better understanding of the business.

Franchisees will need to prepare a business plan, together with financial forecasts to support their request for finance. You will probably need to help with this, but the franchisee should understand the figures and “own” the business plan

Franchising from the franchisee’s perspective
Most of us are only too aware of the scale of the risks associated with starting a business. However, there is a way of significantly reducing the risks – franchising. This gives the franchisee the opportunity to own and run a business under an established brand with a proven business format and market. A well established franchise will provide all the essential elements for a successful business, except the most vital piece, the person who will run the business. The missing piece is you – the dedicated and motivated franchisee.

Advantages

•     You own your individual operation whilst having the benefit of a recognised brand name and the associated goods and/or services.
•     Franchising offers business systems and products/services which have been market tested and proved to work. As a result, the risk of your business failing is usually greatly reduced.
•     The franchise package you receive at the outset will normally include operations manuals, book-keeping and accounting systems, marketing guidance and administrative support. You will, therefore, not have to spend time or money developing these.
•     You should also receive practical help in setting up your operation so you are more likely to avoid any major teething problems.
•     Where appropriate, you will benefit from the bulk purchasing and negotiating capacity of the franchisor, and have an established, reliable source of supply.
•     Your business will also benefit from the franchisor’s advertising and promotional campaigns.

Disadvantages

•     You will be investing in the franchisor’s business as well as your own.
•     You sign a formal contract undertaking to run your business in strict compliance with the franchisor’s specifications. After time, you may feel restricted and want to have a more a free hand in running your own business.
•     As the success of your business grows you may want to spread your wings, but you may not be able to expand into neighbouring areas as they may already be occupied by other franchisees.
•     The brand name or image of the franchise could become less reputable for reasons associated with the franchisor or other franchisees.

So, how do you check out a franchise?
The first step is to assess the franchisor and its business. When you take up a franchise you are entering into a long-term business relationship and it is very important that you spend some time looking into the background and performance of your prospective “partner”. Beware the franchisor who attempts to deny you the time to do your research.

A good franchisor wants you to be happy and confident that you are making the right decision and will welcome your enquiries as evidence of your good sense. You should check how long the franchisor has been in business and in franchising.

Information
These enquiries should be backed up by financial information on the franchisor, including its audited accounts. Your accountant will comment on the accounts for you and a bank reference on the franchisor (provided for you by your bank) will be helpful.

Information on the performance of existing franchisees should be forthcoming and the franchisor should be willing to let you have a full list of franchisees to whom you can talk and preferably visit. A franchisor should also be prepared to admit to any franchisee failures and explain why they failed.

In the case of a new franchise, you should look carefully at the performance of the pilot operations. If there are no pilots you are entitled to ask what you are getting for the franchise fee. You should ascertain whether or not there is a market for the products/services in your chosen area and what the future market is likely to be. The franchisor may have carried out market research in your area, but you should also do your own, ensuring that you understand what the business potential is and are aware of the strength of the competition.

Support
You should then look at the strengths and weaknesses of the franchise operation. Critical to your likely success or failure is the level of support and training provided by the franchisor, both at start-up and subsequently.

Support from the franchisor can include: accountancy packages and advice, holiday cover, national and local advertising, regular communication through newsletters, new products, service and market information, and ongoing training. A number of good franchisors hold, at their expense, annual national conferences, and have franchisee associations.

There should be a comprehensive operations manual, which gives you guidance on all aspects of running your operation. An important aspect to consider is what help, if any, does the franchisor give in respect of any staff recruitment and staff training you may have to undertake.

Some franchisors will train your staff for you while others will train you to train them, and others provide little, or no help at all. Another important aspect is the legal and regulatory issues, particularly in relation to the public and employees, such as insurance, health and safety, tax, local by-laws and so on. Your franchisor should be able to help you deal with all these type of matters, and advise you on any changes that may occur from time-to-time in the laws and rules that might affect your business.

Franchise contract
The next step is to consider the legal implications of the franchise contract. This is a very important document as it sets out the rights and obligations of both yourself, as a franchisee, and your franchisor. You should receive a copy well in advance. It should be examined carefully and it is strongly recommend that you seek independent legal advice on the contract from a solicitor specialising in franchise agreements.

You should not expect a franchisor to amend the terms of the contract to suit you as franchisors generally prefer to have a standard contract for all their franchisees. However, having the contact vetted is not a waste of time as it is important that you fully understand its terms and limitations. If you do not like the contract you are, of course, free to walk away.

Financing
The next step is to examine the financial aspects of the franchise. These broadly speaking fall into two categories – the start-up costs and the projected income and profits. Looking at the start-up costs first, it is important that you identify the total amount of money required to get the business going, including any working capital you will need.

Against the costs will be set the amount of cash you can put into the venture, leaving the sum you will need to borrow. You will then have to consider what assets, if any, you or the business might have available to offer as security for the required loan.

You must be prepared to take a realistic view of what might be a practical possibility in borrowing terms. Whilst unsecured borrowing may be possible in some circumstances for a good franchise, it is, for example, no good thinking you can borrow say £90,000 towards a franchise costing £100,000, especially if you have no security.

Having established the start-up costs and borrowing requirements you will then have to look at the potential earning power of the business on a realistic basis. Does it justify the level of investment that it calls for and how long will it take you to recover the investment?

Projections
You will need to ensure that any profit and cash-flow forecasts prepared by the franchisor for your franchise are sensible (allowing for items, such as borrowing costs and drawings) and that they are based on realistic assumptions. This is also a good opportunity to look closely at matters such as how the franchisor gains its income and if there are any other fees that may be payable.

Borrowing money
It is a big step from deciding to start a franchise to actually opening your doors for business. For many, one of the biggest hurdles is approaching the bank for finance. Of course, there is a lot of work to do to before you, or your bank, part with any money. You will need to research your chosen franchise thoroughly, making sure that it is the right one for you and that you are fully aware of what is involved.

You will also need to ensure you can afford the franchise you are interested in, and that the business offers a good return on your investment. Decisions on how much you are prepared to invest, and whether you will draw on savings or financial support from your family, should all be made before going to your bank.

You will find that for an established franchise system most major banks will lend up to 70 per cent of the start-up costs, while for new franchises the figure will probably be around 50 to 60 per cent.

With this in mind you should approach your bank having considered or prepared the following:-

•     How much will you be able to borrow? Prepare a full list of your personal expenditure: mortgage, hire purchase, household bills, and so on. This will show how much money you will need to take out of the business for living expenses.
•     What security can you offer to back up your loan? You might, for example, have a life policy with some value, or have equity in your home.
•     Start preparing your business plan. This is a vital document to obtain finance from the bank. Your chosen franchisor will often help you with this. As part of your business plan, you will need to prepare cash-flow forecasts for the first couple of years. Your franchisor will help, but you need to be sure that you understand the figures, what they are based on, and how much turnover you will need to break-even.

One of the most common questions I am asked by potential franchisees is, what are the banks looking for when approached for finance for a start-up business? The following outlines HSBC’s basic approach to assessing such requests. It should provide a useful insight, and make that first meeting with the bank an easier and more fruitful experience.

Person – who are we lending the money to? We carry out a full review of your background and reliability; your training, qualifications, and track record; financial resources; and suitability to run the business. The franchisor will also have considered these qualities to ensure you are a suitable franchisee.

Amount: Apart from looking at the actual amount you would like to borrow, the purpose for which the money will be used, and its effect on your business, we also consider whether there is sufficient demand for the product/service you will be offering (the fact that you are going to be investing in a tried and tested franchise format helps here). We will also assess how the money borrowed will benefit the business, the type of finance you are looking for (overdraft, loan or a package of financial services), and how much you are personally prepared to invest in the business.

Normally, you will be expected to contribute towards the total start-up costs from your own resources, but it is important to get the balance right. Often, start-ups underestimate how much they will need to borrow to make the business successful and it is, therefore, important to put a realistic case to your bank. Your franchisor will normally help with setting out details of the start-up funds required and the preparation of cash-flow forecasts.

Repayment: It is not in our interests – or yours – to lend you money unless we think that you can repay it and we will, therefore, ask a number of questions on this subject. Will repayment come from future trading profits, after allowing for all your other financial commitments, or from the sale of an asset? Does the cash-flow forecast show that you will be able to afford to repay the loan? What assumptions have been made in the cash-flow forecast? What level of sales are needed to break-even and are they achievable? Is there a contingency plan for any setbacks?

Security: We must also assess the risk of lending to you and decide whether we require any security. This will depend on our evaluation of your business as a whole. The prime source of repayment will be the cash generated by your business and no amount of security will be acceptable if we feel that your business is not viable. If a business runs into difficulties, the earlier the bank is informed of any problems, the more likely it is that we can help. We always recommend you take independent advice from your solicitor before you provide security.

If no security is available, we may be able to consider finance under the government’s Enterprise Finance Guarantee, if your business is eligible. This is a government-backed scheme that guarantees to the bank 75 per cent of a loan, where security is not available and where that lack of security is the only bar to the bank lending the money.

As a potential franchisee, you are in a better position than a self-employed person setting-up a business from scratch. You have the backing of a proven business format, and the track-record of how similar franchisees are successfully operating their businesses to show the bank in support of your loan application.

So, there we have it – the two sides to franchising – a business in which both need to be fully committed to their responsibilities to each other and both need to succeed if the franchise is to survive and prosper.

What is the BFA?

The BFA is first and foremost a standards-based organisation, membership of which is voluntary. Funding is by membership subscription. It was established in 1977 by a group of major franchisors to act in the interests of the industry as a whole in assessing and accrediting companies which meet its quality criteria and ethical standards, as well as help the world at large distinguish between good practitioners and the rest.

Over time and against a changing backdrop of franchising evolution, the BFA has developed standards to ensure that potential franchisees can continue to give credence to accreditation. Today, admission to membership requires that the applicant franchisor (or professional affiliate) submits to a thorough assessment of its franchising operation against criteria that are rooted in the European code of ethical conduct in franchising and the extension and interpretation adopted by the BFA.

Whilst the BFA uses its best endeavours to establish the eligibility of an applicant, the onus for demonstrating that the criteria have been met on initial accreditation or reaccreditation lies finally with each applicant.

Membership obligations

In joining the association the franchisor members (full, associate and provisionally-listed) commit themselves to comply with the rules of the association and the terms of the policies and procedures it publishes, such as the code of ethical conduct, disciplinary procedure, complaints procedure, appeals procedure, and terms of annual reaccreditation.

Members also agree to:-

• Comply with the code of advertising practice published by the Advertising Standards Authority.
• Provide any non-confidential information relating to their franchise business, or the standing and qualifications of its directors, as requested by an authorised official of the association.
• Provide to a full-time official of the association access (at reasonable times and on reasonable notice) to confidential information relating to the franchise and its standing (on the understanding that such information remains confidential to the authorised official).
• Comply with the spirit and intent of the guidelines to best practice published by the association.

Grades of membership

There are three grades of franchisor membership – full, associate, and provisionally-listed. All are required to conform to the standards and the rules referred to earlier. Members are admitted at the membership grade appropriate to their stage of development. Provisional listing is naturally by far the most common entry level, and direct admission as a full member very rare. Members progress towards full membership after thorough reaccreditation, which not only confirms their operational standards, but also establishes their readiness for upgrading as their business evolves and matures.

Full members: full membership confirms that at the time of the most recent reaccreditation the franchisor met all the standards and criteria of membership, including a commitment to abide by the rules and various procedures of the association (such as the complaints and disciplinary procedures, appeals and reaccreditation rules). In addition, the franchisor demonstrated a proven trading and franchising record, supported by audited accounts and evidence of a track record of successful franchising.

The length of time the franchised business has been in operation, and the changes in business and financial circumstances it must have survived before it can be said to be established will vary from sector to sector. The record on franchise openings, withdrawals and failures (if any), as well as their trading and financial performance, are factors in determining eligibility for full membership, as is evidence that the business is not dependent on the income from the sale of new franchises to sustain itself.

Associate members: associate membership is for the franchisor that has not yet had the opportunity to acquire the depth and breadth of trading and franchising experience that the passage of time brings. Associate members are encouraged to upgrade to full membership when they are ready to demonstrate longevity and variety of experience.

Provisional members: provisional listing is available to businesses with a successful trading record of at least a year that are in the process of developing a franchised business (most often with a pilot operation at this stage). They must also commit to complying with the conditions of membership and working to achieve the standards for associate membership within two years. They will also be taking and applying appropriate professional advice in the development of their franchise proposition.

In addition to franchisors, the BFA has an affiliate category open to professional advisers, who are accredited on their proven professional skills and the successful application of those skills to franchising. They undertake to ensure the advice on franchising they provide to clients is of a standard consistent with the aims and objectives of the European code of ethics.

Criteria for membership

The accreditation process has been developed through a research-based methodology that applies verifiable facts in a highly objective and quantitative manner to arrive eventually at a dispassionate and objective assessment of the applicant company in a franchising context. This is supplemented by references from franchisees, interviews and other appropriate sources of applicable information. In general terms, the entire process measures the applicant company against the following four criteria.

• The business to be franchised must be viable. Evidence must show that the product/service is saleable, and at a level of profit that will sustain a franchised network.
• There is a means for the transfer of the know-how to a new operator at arm’s length, essential if the business is to be franchised.
• The franchise is structured and operated in accordance with the ethical principles of the European code (the franchise agreement is formally assessed by the BFA’s legal adviser).
• All information on the business that is material to the franchise proposition and contract is disclosed without ambiguity to prospective franchisees.

In assessing the information provided by the applicant franchisor, the association looks at the following key assessment areas:-

• Level of product and market innovation
• Experience of the management team in both its sector and franchising
• Focus and strength of the financial model
• Disclosures made to prospective franchisees
• Selection and training of new franchisees
• Initial and continuing support, promised and provided
• Fairness of the contract and the disputes handling record
• Track record of the business in both trading and franchising.

Through its various procedures the BFA is committed to maintaining the high standards which are at its core, and it encourages applications for membership from all sound and ethical franchisors in order to strengthen and enhance the franchising industry, and its reputation and success.

The contract is, of course, important, although it does seem to attract a disproportionate amount of emphasis because no matter how excellent a contract the underlying commercial transaction must first be properly developed. The contract must:

• Deal correctly, in legal terms, with the various property rights owned by the franchisor.
• Provide the basis of the operational aspects and the controls necessary to ensure the maintenance of standards.
• Provide the franchisee with security in his operations and in his ability to develop and sell an asset.

In the final analysis, it is an insurance policy for both parties if things go wrong. If the contract has to be read after signature by either party, it will usually be because there is a problem, and not because one of the parties has insomnia for which dull legalese may be a cure.

Relationship

The personal relationship between the franchisor and the franchisee, together with their common desire to succeed in their respective roles as the business relationship develops, are far more important than the formal contract. In most franchise schemes, the franchisor will own:

• A trade mark, or trade name, and the goodwill with which it is associated.
• A business format – a system recorded in an operations manual, which will contain elements, some of which are regarded by the franchisor as secret and confidential. The franchisor will regard the manual in its entirety as secret and confidential. In some cases, there will be formulae, secret recipes, specifications, design drawings and operational documents.
• Copyright in some of the above items which are in written form and capable of copyright protection.

The recruitment literature of the franchisor will certainly have indicated the nature and extent of the initial services it will provide; the range of continuing services upon which the franchisee will be able to call; and the cost of joining and belonging to the franchise system.

We shall look at each of these factors in turn. However, before we do so, it should be noted that the BFA has, in common with other European franchise associations, adopted the European Franchise Federation’s Code of Ethics and published a best practice guide, The Ethics of Franchising. Whether or not you are considering taking up a franchise with a BFA member you should obtain a copy of this guide (which includes the text of the code of ethics) since it describes provisions in contracts which the BFA considers to be in conflict with the code of ethics.

The initial set up costs, which may include payments for shopfitting or for a vehicle or to suppliers, should invariably include all the items and services necessary to open for business.

The franchisor will also invariably charge a fee to cover the cost to him of providing the initial range of services to the franchisee, as well as a charge for entry into the system.

There can be no hard and fast rule in calculating these fees as each system and what it offers differ. Ignoring the lower end of the cost range, the average amount of the initial franchise fee seems in practice to be in the region of 5 to 10 or more per cent of the total initial costs depending on the range of services provided.

Continuing fees enable the franchisor to finance the provision of the on-going services and back-up. The average continuing fee, together with funds specifically allocated to advertising and promotional expenditure (see below), is usually in the region of 8-11 per cent of franchisee turnover.

It is vital that the franchisor should not have undisclosed sources of income at his franchisees’ expense, nor should he be able arbitrarily to increase the cost of the products which he supplies to his franchisees. The franchisor is as entitled as any other manufacturer, wholesaler or distributor to make a profit on products so supplied.

The initial and continuing fees, however they are described, are essentially a payment by the franchisee to the franchisor in return for the services provided by the franchisor. They are the gross income which the franchisor receives for the provision of services and upon which his business depends to cover its operating costs and to make a profit.

Most franchise systems provide for the advertising and promotion to be handled by the franchisor, who will receive from his franchisees a contribution for that purpose. The most common method of calculating this contribution is the same as for franchise fees, namely as a percentage of the franchisee’s turnover. In some cases, a franchisor may include the advertising expense in the continuing fees and undertake to spend a percentage of the fee on advertising and promotion.

There are also cases where local advertising, rather than national, is more important and a franchisee may find that the franchisor does not seek a contribution, but imposes on the franchisee the obligation to spend a certain amount each year on approved local advertising.

Initial services

The nature of these services will vary, bearing in mind the type of business. Obviously, a van-based mobile franchisee does not need site selection assistance, and conversely, a shop-based franchisee does not need to be taught how to contact and attract his customers, as does the mobile operator.

The general principle is that the franchisor’s initial services (including training) should be sufficiently comprehensive to set-up a previously inexperienced person in business so that he can trade effectively, in accordance with the franchisor’s system, as soon as he opens.

Continuing services

Having established the franchisee in business, the franchisor has the responsibility to provide a continuing range of services to support him. These include:

• Performance monitoring to help maintain standards and profitability.
• Field support including visits to the franchisee’s trading unit.
• Continuing update of methods and new innovations.
• Market research and development.
• Promotion and advertising.
• Benefit of bulk purchasing power.
• The provision at head office of a specialist range of management services.

Features of the contract

The normal features of a contract will be as follows.

1) The establishment and identification of the franchisor’s intellectual property assets which will be made available to the franchisee.

This will include with such things as trade marks, trade names, goodwill associated therewith, copyright material and the franchisor’s business system and know-how comprising confidential information.

2) The nature and extent of the rights granted to the franchisee.

The franchisee will be given the right to use the franchisor’s intellectual property. It is relevant at this point to mention territorial rights, since these create practical difficulties. There are significant aspects to the problem which arise when exclusive territorial rights are a feature which will be dealt with later in this article.

3) The period of agreement.

The basic principle should be that the franchise relationship should be capable of subsisting on a long-term basis. There may be various reasons, such as the legal position in relation to the tied supply of products, for a relatively short initial period (say five years), but most franchise schemes allow for the franchisee to be able to exercise a right of renewal. If the agreement is for a short period and does not grant a right of renewal a prospective franchisee should proceed with caution. It may mean that the franchisor will not even be prepared to agree any renewals or will try to make renewal unreasonably expensive. Beware of relocation clauses which may appear innocent enough, but which could entitle a franchisor to require a franchisee to close down and move to other premises. In effect, this could result in a franchisee being required to open a new business in a new location or risk losing his franchise! Another provision which may give cause for concern is one under which the franchisor can require a complete refit rather, than as is usual, updating to the latest style and image, and a redecoration.

4) The nature and extent of the services provided by the franchisor both initially and on a continuing basis.

The initial services, which enable the franchisee to be initiated, trained and equipped to open for trading should be detailed.On a continuing basis, the franchisor will be providing services which should be detailed in the agreement (see ‘Continuing services’ above). It is absolutely vital that the contract reflects what is promised as initial and continuing services in the franchisor’s sales literature.

5) The initial and continuing obligations of the franchisee.

These will range from accepting the financial burden of setting-up in compliance with the franchisor’s requirements to undertaking to comply with operating, accounting and other administrative systems to ensure that essential information is available to both parties. These systems will be described in an operations manual which will be introduced to the franchisee during training and which he will continue to have available as a reference guide after he has opened for business. The manual should be regularly updated by the franchisor as the system develops.

6) The operational controls imposed upon the franchisee.

The controls are to ensure that operational standards are properly maintained – failure to maintain standards in one unit can harm the whole network. Franchisees will rightly be alarmed if any of their fellow franchisees fails to maintain standards and the franchisor allows them to continue to do so. Often operational controls are very detailed with cross references to the operational manual. The contract will impose the substantive obligations and the manual will explain how these obligations are to be discharged and provide details of how the franchisor’s system is to be operated.

7) Sale of the business.

One of the reasons for the success of franchising is the motivation it provides to the franchisee, which comes with self-employment and the incentive at the end of the day of making a capital gain. For this reason, the franchised business should be capable of being sold. However, there will always be controls. If there are none, it should be a matter for suspicion. After all, if a franchisor is highly selective when considering applications for franchises, there is every reason for him to be equally selective about those who want to join the network by buying a business from an established franchisee. It should be borne in mind that when a franchisee seeks a purchaser for his business it is the only time that someone other than the franchisor takes the initiative in recruiting a franchisee.

The criteria by which a prospective purchaser will be judged by the franchisor should be set out in the contract and should be the same as those applied by the franchisor when considering new applicants for a franchise. The procedure to be followed should also be described in the contract.

Some franchisors insert in the contract an option to buy the business if the franchisee wishes to sell. If such a provision is inserted in the contract, it should provide for the payment of at least the same price as is offered to the franchisee by a bona fide arms length purchaser. Any artificial formula (e.g. net asset value) which might enable the franchisor to buy at less than market value should be resisted.

8.1) Franchisee demise.

In order to give the franchisee peace of mind, provision should be made to demonstrate that the franchisor will provide assistance to enable the business to be preserved as an asset to be realised, or alternatively taken over, by the franchisee’s dependents if they can qualify as franchisees.

9) Arbitration.

Arbitration is in reality private litigation with a judge (arbitrator) chosen by the parties. It has advantages in that the proceedings are private; the arbitrator chosen can be selected because of his special knowledge of the business, which is the subject of arbitration; the timing of the proceedings can be fixed to suit the parties’ convenience; the parties may establish the rules for the arbitration and save time and expense in so doing.

There are also disadvantages. Not every dispute under a franchise contract will be resolved by the decision of an arbitrator (e.g. the franchisor will not want an arbitrator to judge whether his quality standards and system are being maintained; the franchisor’s right to an injunction may be impaired if the arbitration agreement does not reserve those rights to him; the wrong choice of arbitrator may result in a compromise decision which will not satisfy either party).

Bearing in mind the long-term relationship involved in a franchise, those areas where genuine misunderstandings can arise may be considered suitable for arbitration (e.g. fee calculations, rights of renewal). The BFA has introduced an updated arbitration scheme.

The BFA has also introduced a mediation service in an endeavour to assist in the resolution of disputes. Mediation is becoming increasingly used in commercial disputes. It involves the appointment of an independent person as mediator who without taking sides or making judgments, seeks to assist the parties in reaching a settlement which they find acceptable. All contacts and discussions are off the record, and no-one is bound to a deal unless they agree. One of the advantages of this procedure is that the parties are able to open up to the mediator about what really troubles them in the knowledge that he will not pass that information to the other unless they specifically authorise it. With the knowledge acquired one hopes that the mediator can find a route to the common ground which is so necessary to achieve a solution.

Another development in 1999, which has had an impact on dispute resolution, was the radical change in litigation procedures which are intended to make litigation quicker and cheaper. Whether the system which has been put in place will prove capable of achieving its objective remains debatable. However, there will be an emphasis on mediation proceedings in an attempt to cut down the volume of litigation.

10) Termination and its consequences.

Invariably, there will be express provision for the termination of the agreement in the event of a default by the franchisee. The franchisee should be given the opportunity to put right minor remediable breaches so as to avoid termination, providing that he does not persist in making such breaches.

The consequences of termination will usually involve the franchisee in taking steps to ensure that he ceases to claim any association with the franchisor. The franchisee will no longer enjoy the use of the trade mark/trade name, and other property rights, owned by the franchisor. In addition, the franchisee will be under an obligation for a period of time within an area which will include his trading premises or territory not to compete with the franchisor, nor will he be allowed to make use of the franchisor’s system or other methods.

Territorial rights

We have now reviewed the 10 features of a franchise contract. Under item 2, I referred to the fact that the granting of territorial rights gave rise to two types of problem and I would now like us to deal with them.

Firstly, there are the commercial considerations which have caused many problems for franchisors over the years. It must be recognised that it is very difficult to determine a territorial arrangement, which is fair to both parties, especially when the extent of the likely penetration of the market cannot be judged. Indeed, quite often even the total size of the potential market cannot be estimated.

In the past, many franchisors, who have chosen the exclusive territorial route, have found that there is no effective way of ensuring that the potential of the area was fully exploited.

The effect of this is to harm the whole network. Quite apart from the fact that within the area a market and demand is being created by advertising and promotion which is not met by existing resources, the way is prepared for competition to move in and do better. Also, disgruntled customers, or potential customers, are not likely to look elsewhere within the same network for their requirements. The franchise thus gets a bad name.

The obvious response is to suggest that performance targets should be established. Since the assessment of fair performance targets is dependent upon the same factors as have to be considered in defining a territory, the problem remains basically the same. Additionally, if performance targets are set to be effective they must take into account the potential expansion of the business as well as inflationary factors. These are also difficult matters to deal with in a fair and equitable way.

There are also the implications to consider of the EU block exemption for vertical agreements in situations where the benefit of the regulation is sought (see appendix four).

Technological changes have to be considered and contracts need to deal with the resulting issues.

UK Competition Law

The Competition Act 1998 is similar to, but not identical to, the EU Competition laws and does provide for the exemption of agreements. Agreements which benefit from the exemption granted by the EU block exemption agreement for vertical agreements will be exempt from the Competition Act prohibition. There will be many agreements which may not be affected by the Competition Act.

In a brief article of this nature, it is not possible to cover every aspect in detail. The points highlighted above will I hope have explained some of the basic features of the franchise contract and should enable the reader to approach it in a reasonably enlightened way. It is essential for readers to obtain professional advice as to how the law, particularly competition law, may affect them and their businesses.

The law relating to data protection has been extended and franchisors will need to take advice to ensure that they and their franchisees comply with it. Franchisors, particularly those who would like or need customer details, will have to pay close attention to this law (see more below). In addition, there are laws on e-commerce which have to be complied with and if your franchise involves this sector make sure you have up-to-date advice.

Data Protection Law

Regard has to be paid to the effect of data protection law (privacy laws) which impacts the way in which personal data is processed. Dealing with customer information can be affected by this legislation.

Consumer credit regulation is another area of the law which applies in certain circumstances. The basic requirement is that franchisors and franchisees need to obtain advice.

THIS AGREEMENT is made ……………… day of ……………… 201( ) between ……………… the registered office of which is ……………… (hereinafter called “the Franchisor”) of the first part and of ……………… (hereinafter called “the Franchisee”) of the second part

WHEREAS:-

A. The Franchisor has spent time money and effort in obtaining and developing knowledge of and expertise (“the Know-How”) in ……………… hereinafter called “The Services”.

B. The Franchisor wishes to expand the Provision of the Services, and is willing to grant to the Franchisee the rights set out herein.

C. The Franchisee desires the right during the continuance of this Agreement to provide the Services from the premises specified in Schedule One hereto (“the Premises”) under the Marks (detailed in Schedule Two), as directed in the operation manual (“the Manual”).

D. The business of providing and marketing the Services is hereafter called “the Business”.

E. The equipment from time to time required by the Franchisee for use in the Business is hereafter called “the Equipment”.

NOW IT IS AGREED AS FOLLOWS:-

1. Rights Granted

The Franchisor grants to the Franchisee during the period of this Agreement and subject to the terms and conditions hereof the rights to carry on the Business in accordance with this Agreement from the Premises, to utilise the Know-How and to use the Marks.

2. Term

Subject as herein appears this Agreement shall be for a period of ……………… years, commencing the ……………… day of ……………… 201( ).

3. Renewal

If the Franchisee gives written notice of his desire to renew the Agreement, then provided that at the time such notice is given this Agreement is valid and subsisting and the Franchisee shall not be in breach of his obligations under this Agreement, the Franchisor and the Franchisee will enter into a new standard Agreement in such form as is currently being offered to new Franchisees at that time, to operate from the date of the expiry of this Agreement.

4. Franchisor’ s obligations

The Franchisor shall:-

(a) Assist the Franchisee to establish and efficiently operate the Business from the Premises and to provide him with a Manual, the copyright in which shall at all times remain the property of the Franchisor;
(b) Train the Franchisee and the Franchisee’s staff in the correct operation of the Business at the cost specified in Schedule Three.
(c) Train the Franchisee and the Franchisee’s new and existing staff in the Services. The cost of this training shall be as detailed in Schedule Three.
(d) Give the Franchisee such reasonable continuing assistance and advice as the Franchisor considers necessary for the efficient running of the Business.
(e) Ensure that the Manual shall be kept up to date with any alterations and/or improvements in or to the operation of the Business.

5. Franchisee’s obligations concerning the marks

(1) The Franchisor authorises the Franchisee to use the Marks solely for the purpose of promoting the Business and any usage will be in accordance with the reasonable directions of the Franchisor;

(2) The Franchisee undertakes not to do anything to prejudice or damage the goodwill in the Marks or the reputation of the Franchisor, but may challenge the Franchisor’s intellectual property rights;

(3) If the Franchisee becomes aware of any infringement of the Marks by any other party trading with Marks similar or identical to the Marks, the Franchisee shall immediately notify the Franchisor thereof in writing;

(4) The Franchisee shall use only the Marks in connection with the Services;

(5) The Franchisee shall comply with all reasonable requirements from time to time laid down by the Franchisor as regards the use and presentation of the Marks;

(6) The Franchisee shall ensure that any items of equipment regularly used by the Franchisee in carrying out the Services, shall carry such words devices and/or designs and in such prominence and colour, as may be specified by the Franchisor;

(7) Where required by the Franchisor the Franchisee shall join with the Franchisor at the Franchisor’s cost and expense in making or to make application to become the registered user of the Marks and to conform to the terms of the said registered user agreement.

6. The Franchisee’s obligations concerning the Equipment

The Franchisee agrees in order to protect the Franchisor’s intellectual property rights and maintain the common identity and reputation of the network to comply with quality specifications laid down for the Equipment.

7. The Franchisee’s general obligations

In order to maintain the uniform high standards of the Services, and to protect the Franchisor’s intellectual property rights and maintain the common identity and reputation of the franchise network, the Franchisee hereby agrees;

Carry on business

(a) To carry on the Business under the Marks and no other name;

Premises

(b) Not to carry on the Business from any location other than the Premises without the Franchisor’s prior written consent.

Commencement

(c) To commence the business from the day of ……………… 201( ) and to carry it on as a legally and economically independent party.

Hours

(d) To provide the Services from the Premises at least between the hours of 9.00 am and 5.30 pm on Monday to Friday inclusive;

Diligence

(e) To use his best endeavours and the highest standards in all matters connected with the Business and to carry on the business diligently and in a manner in all material respects to the reasonable satisfaction of the Franchisor and as may be reasonably required by the Franchisor from time to time in accordance with its image and reputation;

Personnel

(f) To ensure that all personnel employed by him in the Business shall at all times be clean and tidily clothed in any designated clothing or otherwise. The Franchisee shall ensure that they comply with all of the Franchisor’s requirements as regards cleanliness, clothing, appearance or demeanour;

Staff training

(g) To ensure that all his employees are trained by the Franchisor before actually working in the business;

Access to staff and customers

(h) To permit the Franchisor and or his agent without any further or other authority or notice, to speak to customers and the Franchisee’s staff about the Services being provided by the Franchisee;

Franchisor’s requirements

(i) To comply with all reasonable requirements consistent with the terms of this Agreement as are from time to time notified by the Franchisor for the efficient conduct of the Business;

Insurance

(j) To insure with a major reputable insurance company in an adequate sum against all normal and reasonably foreseeable risks relating to the conduct of the Business including product liability howsoever arising negligence or other acts or omissions by the Franchisee or any person for whom the Franchisee is responsible and cover all public and employees liability and death of or injury to any customer or any other person or damage to any motor vehicle used by the Franchisee and provide copies of such insurance policies and proof of premium payments to the Franchisor upon its request and the Franchisee will provide to each insurer full and complete information relevant to or which may be required in respect of any insurance policy and, ensure that he does nothing which in any way invalidates it;

Notice of status

(k) To clearly indicate on all literature and correspondence and by way of a prominently displayed notice board at the Premises the fact that it is an independent franchisee of the franchisor and is in no other way connected with it.

Indemnity

(l) To indemnify and keep indemnified the Franchisor from and against all loss damage or liability suffered by it as a result of the Franchisee’s acts or omissions.

8. The Franchisee’s financial obligations

The Franchisee shall pay to the Franchisor the following sums;

(a) Immediately upon signing this agreement a franchise fee in the sum specified in Schedule Three below.
(b) Upon the Franchisor’s request and prior to receiving initial training to pay the Franchisor for the initial and continuous training referred to in clause 4 above.
(c) A monthly Service Management Fee equivalent to 5% of the previous month’s turnover.
(d) Subject to clause 9 below at the request of the Franchisor, a contribution to the Franchisor’s Advertising and Promotion Fund.

9. Promotion and advertising

(1) The Franchisee shall upon receiving written notice from the Franchisor pay on a monthly basis, a sum equivalent to 2% of the previous month’s gross turnover or £2,000 per annum whichever is the higher into the Franchisor’s Promotion and Advertising Fund.

(2) The Franchisor shall keep records of the fund and shall pay the monies into a separate designated bank account in the name of the “Advertising and Promotion Fund” The Franchisor shall use these funds solely for the national and regional advertising of the services.

10. Franchisee’s accounts

The Franchisee shall maintain proper books of account relating to the business and shall employ a Chartered/Certified Accountant to prepare annual accounts for the business and the Franchisee shall supply the Franchisor:

(a) within thirty days after the end of each financial year with an audited certificate as to the Franchisee’s gross turnover during such period calculated in accordance with this Agreement;
(b) within ninety days after the end of each financial year with a certified copy of the audited profit and loss accounts and balance sheet of the Franchisee’s Business and such other accounting and financial information relating to it as may reasonably be required by the Franchisor;
(c) The Franchisee shall provide to the Franchisor any certificates etc. set out in (a) and (b) above which shall be prepared after the termination of this Agreement but which shall relate to any financial period of the Franchisee which falls in whole or in part within the period of this Agreement.

11. Audit

(1) The Franchisor or its Auditor or authorised representative shall be entitled to inspect and audit the books of account and all supporting documentation of the Franchisee relating to the Franchisee’s Business at anytime in respect of the whole or any part of the period of this Agreement and within six months after the receipt by the Franchisor of the audited accounts for the year or other period of this Agreement up to the termination or surrender of this Agreement or sale or transmission of the Franchisee’s Business to a new Franchisee by the Franchisor giving written notice to the Franchisee such inspection or audit to be during reasonable business hours;

(2) If the audit (or any other periodic inspection not being a full audit) shows that the accounting of the Franchisee as to the calculation of the payments due under this agreement, and/or any other financial matter is incorrect, the Franchisee undertakes promptly to rectify the defect in the amount accounted for and/or the accounting system defect as the case may be.

12. The sale of the business

(1) The Franchisee may not assign or delegate his Franchise or any other right or obligation under this Agreement, but may sell his Business with the prior written consent of the Franchisor and subject to the conditions listed in (2) below, the Franchisor undertakes to grant to a purchaser of the Franchisee’s Business who is acceptable to the Franchisor, an Agreement for the period of not less than ….. years commencing on the date of the sale of the said Business such Agreement to be in the form of the standard Agreement offered by the Franchisor to its Franchisee’s current at that time;

(2) The conditions required to obtain the written consent of the Franchisor to the sale of the Franchisee’s Business shall be:

(a) any proposed purchaser shall meet the Franchisor’s standards in all respects;
(b) the Franchisee shall pay to the Franchisor the sum of 20% of the sale price if the Franchisor has introduced the purchaser, and 5% otherwise (except that where the Franchisor exercises these options under Sub-Clause (3) below to purchase the business, no such payment shall be due to the Franchisor);
(c) the Franchisee must not be in breach of any obligations to the Franchisor under the terms of this Agreement;
(d) the sale must be completed in time to enable the Franchisor to enter into a replacement Franchise Agreement with the purchaser before the expiry of this Agreement.

3. (a) the Franchisee shall submit to the Franchisor a copy of the proposed purchaser’s written offer (the Purchase Offer) to purchase the said Business from the Franchisee together with a financial statement of affairs and a business history of the proposed purchaser and any further information which the Franchisor may reasonably require;

(b) upon receipt of the Purchase Offer accompanied by such items the Franchisor shall have in addition to its other rights hereunder, an option to purchase the said Business for the same amount and on the same terms as those set out in the purchase offer such option to be exercised by notice in writing given to the Franchisee within twenty-eight days after the receipt by the Franchisor of the purchase offer during which period the terms of the Purchase Offer can not be altered;

(c) if the Franchisor does not exercise such option and consents to the proposed purchase a condition thereof is that the proposed purchaser shall deposit twenty-five percent of the purchase price with the Franchisor and that upon completion of the sale the purchaser shall pay the balance of the purchase price to the Franchisor’s solicitor (as agent for the Franchisee) subject to a lien for any monies owed to the Franchisor by the Franchisee, and the Franchisor shall deduct from the said purchase price the amount of any unpaid obligations of the Franchisee to the Franchisor together with the amount due in accordance with this agreement and shall remit any outstanding balance of the purchase price to the Franchisee within thirty days after the date of the receipt of the final amount of the purchase price by the Franchisor;

(d) if the sale of the business proceeds under (c) above, it is a condition of the consent of the Franchisor that the terms of the offer notice are the terms of the sale and if the sale price or any other significant term of the offer notice is changed the amended terms shall constitute a new offer notice which shall be submitted to the Franchisor to be processed under this sub-clause in place of the original offer notice.

(4) This Agreement is only granted to the Franchisee on the condition (which is of the essence of this Agreement) that it is granted to him as an individual person and if the Franchisee intends to change the structure of his trading style to a partnership or to a Limited Company or in any other manner it is agreed that any such intended change shall be deemed to be an assignment of this Agreement which shall require the prior written consent of the Franchisor under this Clause;

(5) The Franchisor shall be entitled to assign the benefit of this Agreement to any other party at anytime and shall inform the Franchisee thereof in writing within a reasonable time thereafter.

13. The death of the franchisee

In the event of the Franchisee dying during the period of this Agreement and if a replacement Franchisee nominated in writing by the personal representative of the Franchisee and who is acceptable to the Franchisor as set out in Clause 12 above enters into a written undertaking with the Franchisor within twenty-eight days from the date of the death of the Franchisee to observe and perform all the obligations imposed on the Franchisee by this Agreement then this Agreement shall continue in force with the substitution of the new Franchisee. In the event of no replacement Franchisee being nominated or accepted or in the event of him declining to undertake with the Franchisor as aforesaid then:

(a) The Franchisor shall manage the business on behalf of the personal representative of the Franchisee until such time as a new Franchisee is appointed or the Franchisor terminates this Agreement pursuant to this Clause and during such management period, the Franchisor shall be entitled to the Caretaker fee specified in Schedule 4 below together with the cost of the travel accommodation and subsistence of any employee or other representative of the Company engaged in such management and entitled to 20% of the pre-tax profits of the business (such profits to be calculated in accordance with generally accepted accounting policies applied on a consistent basis).
(b) Both the Franchisor and the Franchisee’s personal representatives shall try to find a purchaser who shall be acceptable to the Franchisor and if a purchaser is found the Franchisor shall grant to him an Agreement according to Clause 12 above and the Franchisee’s estate shall be entitled to such sum as the purchaser is willing to pay for the grant of such Agreement (after deducting 20% thereof which shall be payable to the Franchisor).
(c) If such a replacement Agreement has not been entered into within six months from the date of the death of the Franchisee, the Franchisor shall have the option at any time thereafter to terminate this Agreement on paying to the Franchisee’s personal representatives a sum equal to 5% of the annual turnover of the last accounting period.

14. Termination

(1) The Franchisor may terminate this Agreement forthwith by notice in writing to the Franchisee:

(a) If the Franchisee shall have committed any material breach of his obligations hereunder or shall have failed to remedy any remediable breach within a period of twenty-eight days of the receipt of a notice in writing of the Franchisor requiring him to do so;
(b) If the Franchisee shall commit an act of bankruptcy or have a receiving order made against him or make any arrangement or assignment with or for the benefit of his creditors or suffer distress or execution to be levied or threatened on any of its properties;
(c) If any sum or document required under the terms of this Agreement is not paid or submitted at the latest within twenty-one days following its due date;
(d) If the Franchisee ceases or takes any steps to cease his business;
(e) If the Franchisee challenges the Franchisor’s lectual property rights.
(2) The termination or expiry of this Agreement shall be without prejudice to any rights and obligations conferred or imposed by this Agreement in respect of any period after such termination and shall also be without prejudice to the rights of either party against the other in respect of any antecedent breach of any of the terms and conditions hereof.

15. Post termination provisions

(1) In the event of the termination of this Agreement howsoever arising. In order to protect the Franchisor’s intellectual property rights and reputation:

(a) the Franchisee shall forthwith return to the Franchisor all stationery and signs bearing the Marks then in its possession whether or not supplied by the Franchisor; (b) the Franchisee shall not at anytime thereafter:

(i) disclose or use any confidential information or Know-How related to the business acquired by him during or as a result of this Agreement (save that it shall be allowed to use such Know-How that has come into the public domain by means other than the Franchisee’s breach);
(ii) make any use of the Marks;
(iii) purport to be a Franchisee of or otherwise associated with the Franchisor;
(iv) use any recommendation or reference provided as a result of his work as a Franchisee;

(2) The Franchisee shall not for a period of one year thereafter directly or indirectly be engaged concerned or interested in a business which competes with the Services within a radius often miles from the Premises (save for a financial interest which does not allow it to influence the economic conduct of such a business).

(3) The Franchisee shall not for a period of one year thereafter directly or indirectly be engaged concerned or interested in a business similar to the Business which operates within a radius of ten miles from any premises in the United Kingdom from which the Business is being carried on by any franchisee of the Franchisor or by the Franchisor itself (save for a financial interest which does not allow it to influence the economic conduct of such a business).

16. Copyright

(1) The copyright and all other rights in the text of the Manual photographs all other documents supplied by the Franchisor and all secret or confidential information contained therein are the property of the Franchisor and the Franchisee undertakes not to copy the Manual photographs and other documents supplied by the Franchisor or to disclose any of its contents or concepts to any other party and not himself to make any direct or indirect use thereof otherwise in providing the Services.

(2) For the purpose of this Clause:

(a) The Manual shall be deemed to include the Manual as originally provided to the Franchisee together with all additions and amendments thereto from time to time;
(b) Secret or confidential information shall include all confidential information provided to the Franchisee from time to time by memorandum or correspondence or otherwise howsoever appertaining to the provision of the Services and the business of the Franchisor (save for that which has come into the public domain other than through the Franchisee’s own breach).

17. Entire agreement

This Agreement and the Manual expresses the entire agreement between the parties hereto which supersedes any other negotiations or agreements on the subject matter hereof and;

(a) the parties confirm that the whole of their negotiations and intentions have been included herein within the context of and expressing clearly the requirements of the parties.
(b) there are no warranties representations or other matters relied upon by the Franchisee causing his signature hereto which have not been satisfied herein;
(c) this Agreement shall not be modified in any way except by a written instrument signed by both parties hereto.

18. Waiver

The failure of the Franchisor to exercise any power given to it hereunder or to insist upon strict compliance by the Franchisee with any obligation hereunder and no custom or practice of the parties shall constitute any waiver of any of the Franchisor’s rights under this Agreement. Waiver by the Franchisor of any particular default by the Franchisee shall not affect or impair the Franchisor’s rights in respect of any subsequent default of any kind by the Franchisee nor shall any delay by or omission of the Franchisor to exercise any rights arising from any default of the Franchisee affect or impair the Franchisor’s rights in respect of the said default or any default of any kind.

19. Severability

If any item or provision contained in this Agreement or any part thereof (in this Clause called the “offending provision”) shall be declared or become unenforceable invalid or illegal for any reason whatsoever including but not detracting from the generality of the foregoing a decision by the competent domestic or European courts an Act of Parliament, European Economic Community legislation or any statutory or other bye-laws or regulations or any other requirements having the force of law the other terms and provisions of this Agreement shall remain in full force and effect as if this Agreement had been executed without the offending provision appearing herein. In the event that the exclusion of any offending provisions shall in the opinion of the Franchisor adversely affect either the Franchisor’s right to receive payment of fees or remuneration by whatever means payable to the Franchisor or the Franchisor’s Marks and Known-How methods of the business then the Franchisor shall have the right to terminate this Agreement on thirty days notice in writing to the Franchisee.

20. Warranties

The Franchisee shall make no statements representations or claims and shall give no warranties to any customer or potential customers in respect of the Business save such as may have been specifically authorised by the Franchisor such authority to be given either in writing or in the Manual in force at the relevant time. The Franchisee hereby undertakes with the Franchisor to keep it fully and effectively indemnified against all claims demands losses expenses and costs which the Franchisor may incur as a result of any breach by the Franchisee of this provision or of any other provision contained in this Agreement.

21. Improvements

(1) The Franchisee shall use all reasonable endeavours to conceive and develop new and improved methods of carrying out the Services and improvements in the apparatus operating procedure and other additions or modifications to the Services (hereinafter referred to as “Improvements”). The Franchisee agrees to disclose fully any Improvements to the Franchisor and the Franchisor shall determine the feasibility and desirability of incorporating them into the relevant Services. Any non-patentable Improvement approved by the Franchisor may be used by the Franchisor and all Franchisees of the Franchisor without any obligation to the Franchisee for royalties or otherwise;

(2) The Franchisee shall give the Franchisor the right of first refusal at a fair price (to be fixed by an appropriate independent arbitrator in the event of disagreement) of all rights in any Improvement which is capable of being patented.

22. Force majeure

This Agreement shall be suspended during the period and to the extent of such period that the Franchisor reasonably believes any party to this agreement is prevented or hindered from complying with its obligations under any part of it, by any cause beyond its reasonable control including but not restricted to strikes, war, civil disorder, and natural disasters. If such a period of suspension exceeds 180 days, then the Franchisor shall upon giving written notice to the Franchisee, be able to require that:

(1) all money due to the Franchisor shall be paid immediately, and
(2) the Franchisee shall immediately cease trading, until further notice from the Franchisor.

23. Arbitration

If any dispute shall arise between the parties hereto concerning the construction interpretation or application of any of the provisions of this Agreement whether during the continuance of this Agreement or after the termination thereof by whatever cause such dispute shall be referred to the arbitration of a single arbitrator to be appointed by the President for the time being of the Law Society of England, provided always that this Clause shall have no application to terms of this Agreement concerning restrictions against competition and non-disclosure, and the parties hereto agree to be bound by the terms of such arbitration and to bear the costs of such arbitration in equal shares.

24. Definition

Masculine includes the feminine and the singular the plural and vice versa and obligations undertaken by more than a single person including a company or firm are joint and separate obligations.

25. Notices

Any notice required to be given for the purposes of this Agreement shall be given by sending the same by prepaid First Class post, e-mail, or fascimilie to, or by delivering the same by hand at, the relevant address shown in this Agreement or such other address as shall have been notified (in accordance with this Clause) by the party concerned as being its address for the purposes of this Clause. Any notice so sent by post shall be deemed to have been served two days after posting and in proving this service it shall be sufficient proof that the Notice was properly addressed and stamped and put into the post. Any notice sent by e-mail or fascimilie shall be deemed to have been served on the next day following the date of despatch thereof which is a business day.

Schedule One: “The Premises”

Schedule Two: “The Marks”

Schedule Three: “Payments”

Schedule Four: “The Caretaker Fee”

Signed for and on behalf of ……………… Limited by

…………………………………………… Director

…………………………………………… Witnessed by

…………………………………………… Signed by

…………………………………………… Witnessed by

As a franchisee, you should have a basic understanding of any financial information you are shown, or you need to produce. Of course, you can always get help from your local accountant, but you should understand the figures so you can assess the franchise. What are the sets of figures most commonly seen in franchise presentations and prospectuses?

Cash-flow forecast

In many ways, the cash-flow forecast is the most important document. It measures the anticipated flow of payments received, against the products or services you supply. It is vital to try to predict what will happen because sometimes you may have to allow customers credit and therefore wait for payment, but by doing so you risk not being able to pay your own creditors.

Many otherwise successful businesses have gone bankrupt simply because they don’t have enough money to pay suppliers who are not prepared to wait. It is not uncommon for businesses to show healthy profit levels and yet be strapped for cash, and for others which have healthy cash levels to show losses.

One of the main reasons for this is that the accounts reflect the position at the end of the relevant accounting period as if all income had been received and all expenditure made. In reality, this is not often the case.

For example, sales made within the last month or so may well have been invoiced out, but the cash may not be received until after the end of the accounting period. Conversely, electricity may have been consumed during the period, but the invoice for its supply may not have been received.

Cash-flow is an area which is often overlooked, but it needs to be given a top priority because if not properly managed, it will cause problems for your business. It is worth bearing in mind that the accounts show the overall result of trading for a set period and do not necessarily reflect the current performance. This is a good reason for having quarterly, or even monthly, management accounts in addition to annual accounts.

You might expect a healthy turnover and have planned accordingly, but if your customers have problems paying your income can soon dry up. Even a well performing business can get into trouble if income does not coincide with expenditure. Forecasting is not an exact science, but the figures are valuable as long as they are based on thorough research and an understanding of the marketplace. Banks usually like to see cash-flow predictions for at least 12 months and more often for two or three years ahead. This forward planning enables the bank to identify how much working capital is required by the business. The main items the forecast should identify are projected sales, direct costs and overheads.

Ensure your estimates are as realistic as you can make them, and be careful not to make the figures too optimistic – err on the side of caution. Overheads in particular can be costlier in reality than were estimated and actual sales lower than were expected.

Don’t be tempted to measure the success of your business purely in terms of bottom-line profitability. Although profits are important, it is cash-flow which enables a borrower to repay a loan on time. So cash management is vital to all businesses. The purpose of a cash-flow forecast is to predict the cash position on a regular basis, usually monthly.

Reasonable assumptions must be used in the projections – it is no good assuming that debtor payments will be received within 30 days of being invoiced if experience shows that they normally take 45 days. It is best to err on the cautious side and assume payments will be received later than you might normally expect and that payments out will need to be made slightly earlier.

A cash-flow forecast is normally drawn up showing all the expected receipts, category by category in a given period, followed by all the payments out. A net inflow and outflow for the period is established and then added or subtracted from the opening cash balance to produce an anticipated end of month position.

Profit and loss forecast

The profit and loss forecast matches the income and expenditure of your business to the period in which goods or services were provided. Business plans often include monthly profit or loss forecasts for the first year of operation, followed by monthly or quarterly projections for two or three years. This profit forecast will enable you and potential investors to assess whether the business is viable in the long term.

Often, a franchisor will provide projections for two or three years trading to give you an idea of how the business could progress. The franchisor will often advise you how the figures have been arrived at and, if not, you should ask. You may be given a range of figures, representing different levels of franchisee performance, or perhaps showing different sizes of outlet. The figures should be based on actual franchisee performance, or in the case of a new franchise on the operation of the pilot units.

You should do some investigation yourself, and not just take the figures as read. Check the business rent and rates in your area if the franchise is premises based. If you need to employ staff, what are typical wage rates, and how easy is it to recruit them?

By law, if your business is a limited company, you must produce a profit and loss account each financial year. Self-employed sole traders and partnerships do not need to do this, but they will need to complete a self-assessment tax return, which will provide similar information. However, it is a good idea to produce formal accounts, particularly if you need to borrow money, as the bank will usually ask for the figures.

Often the projected profit and loss figures provided by the franchisor do not include any deductions for depreciation, borrowing costs or drawings/salaries, as these may vary according to each franchisee’s situation. You should factor these costs back in when you are assessing whether you want to go ahead and buy the franchise.

The salaries or drawings of sole traders and partners are treated differently in accounts from the salaries of directors of limited companies. The salaries of directors are deducted in the accounts and net profits are shown after these payments. However, the drawings of sole traders/partners are shown in the balance sheet under the heading capital accounts so net profit is shown before these payments. The same also applies to tax. Income tax due by limited companies under PAYE (being a company liability) is usually shown in the accounts. Tax owed on drawings is not usually shown as it is the personal liability of an individual, not the business.

Break-even

Break-even represents how much sales volume your business needs to start making a profit. The break-even point is important when looking at profit and loss projections. You should think about how realistic the projected break-even sales volumes might be. Is it reasonable to expect that you can sell a given number of units in an hour/day/week/month?

Gross profit is the difference between the income from the sale of the goods set against the actual cost of buying-in the goods. These costs are often known as direct or variable costs as they are associated directly with the cost of the goods and vary more or less in proportion with sales.

Net profit is arrived at after deducting all other costs from the gross profit. These costs include rates, heating, and administration, etc. and are known as indirect or fixed costs. This is because they do not vary directly with sales and do not generally change; businesses do not receive a reduction on their rates just because they are experiencing lean times. Splitting the figures like this allows you to calculate the break-even point.

Balance sheet forecast

A projected balance sheet is a statement of the assets and liabilities of the business. It presents the anticipated financial position of your business at a particular moment in time. It does this by showing what the business will own in terms of fixed and current assets, against what the business will owe in terms of long-term and current liabilities.

Balance sheets are usually presented showing all the assets, and then deducting the liabilities to parties outside the business and leaving a figure, which is balanced by the owner’s capital in the business.

Fixed assets include property, equipment, and vehicles, etc. Current assets include cash, debtors and stock, while current liabilities will include trade creditors and other short-term creditors, such as rent and rates and bank overdrafts. Long-term liabilities will usually be in the form of loans or other borrowing taken over a period in excess of 12 months. In limited companies, the owner’s capital is usually the issued share capital and the accumulated profit and loss account balance. For partnerships and sole traders the owner’s capital will be the capital accounts after drawings.

When discussing balance sheets bankers will often use the term liquidity. A business is liquid when its current assets exceed its current liabilities. In theory, current assets such as debtors and stock can be quickly turned into cash to settle urgent and outstanding current liabilities. Obviously, there is more to the assessment of liquidity than this simple definition as stock cannot always be sold quickly.

Another phrase often mentioned in association with balance sheets is the capital position. This is the stake or owner’s capital which is a good indicator of a business’s financial strength. The strength of the capital position, however, needs to be viewed in relation to the size of the business operation. For instance, a business with capital of £1m is very strong if its turnover is £500,000 per annum, but much weaker if its turnover is £100m per annum.

Gearing is another term often used in relation to the balance sheet. This refers to the ratio of the borrowings of a business in relation to its capital (normally shareholder funds and any retained profits), expressed as a percentage. A business with a gearing greater than 100 per cent is usually considered to be highly geared as its borrowing exceeds its capital. A heavy reliance on borrowed money makes a business more vulnerable to increases in interest rates, and higher payments are likely to drain cash flow.

Accounting conventions can affect the way a balance sheet looks. This is not to say that balance sheets are not a true and fair view, but the basis on which the figures are arrived at should be closely examined and the appropriate conclusions drawn. Freehold properties are often included in balance sheets at the price at which they were bought many years or even decades ago. It is likely that the property will have a current market value in excess of its historical value. This difference is referred to as a hidden reserve because it only becomes apparent if a formal revaluation exercise is undertaken and the increased value is reflected in the balance sheet valuation. If this is done, the balancing item will be shown in the owner’s capital.

Alternatively, if an existing business has been purchased, it may have an asset in the new owner’s balance sheet under goodwill. This is the value placed on the business over and above its tangible value in recognition of the existing level of business and numbers of customers. Goodwill is intangible and will certainly disappear if the business runs into difficulties. So it is often discounted when professionals are looking at the capital of a business. In any case it should be written off (amortised) over a period of years.

Stock can be overvalued or undervalued depending on the circumstances. It is often valued on a conservative basis at cost, whereas its real value might more realistically be represented by its resale value so leading to a hidden reserve. On the other hand, the valuation might include a proportion of old stock that is in reality unsaleable so this stock would be overvalued.

Any projections provided by the franchisor will only be a basis for you to build your own business plan and projections, but they will at least give you a starting point. You should use them to evaluate the franchise and make your decision on whether you want to go ahead. How long will it take you to get pay-back on your initial outlay? How much will you need to borrow to get the business up and running?

Money is not always the only factor in choosing a franchise. Quality of life and the satisfaction of being your own boss, with support from the franchisor and the franchise network, are also very important.

You don’t want to lose your hard-earned savings, so time taken at the outset to understand the costs and potential returns, as well as assessing the other important aspects of the franchise, will be time well spent.

The judiciary are notoriously unsympathetic towards franchisors when they litigate against their franchisees. Perhaps Lord Roskill, the chairman of the Fraud Trials Committee, best typifies their approach in his 1986 report. He stated that:

“Fraudsters induce investors to buy franchises …. holding out the prospect of large returns on the investment. But once a payment has been made, the franchise proves worthless….”

Despite the reality of the situation, the court generally sees master franchisees and developers as “the little man” and franchisors as large corporate entities, focused more on profit than fair dealing. They are, therefore, usually only too willing to accept the suggestion that the franchisor has encouraged the hapless master franchisee or developer to invest in the franchise by making gross misrepresentations of the truth.

The reality is, of course, somewhat different. Whilst some franchisors may make over-inflated claims when recruiting master franchisees and developers, the breakdown of the relationship and any resulting litigation is usually due to a mismatch of expectation between the franchisor and the master franchisee/developer, and not any misrepresentation by the franchisor. In other words, the franchisor has failed to undertake appropriate risk management.

Consequences

Nobody likes to take the blame for their own failure. Master franchisees and developers are no different. If their franchised business fails, the natural reaction is for them to try and blame the franchisor, rather than themselves for this failure.

Franchisors, who have failed to properly implement a risk management strategy and who are found to have made misrepresentations to prospective franchisees, can find themselves subject to substantial awards of damages. It is, therefore, in the franchisor’s very best interests to make sure that it manages the risks by implementing an appropriate disclosure system when recruiting franchisees.

The implementation of an appropriate risk management strategy will mean that prospective franchisees are given relevant, quality information about the franchise in good time before they execute the franchise agreement.

In all jurisdictions, franchise agreements are subject to the law of contract, and a master franchisee/developer can sue a franchisor for breach of contract if it does not fulfil its obligations under the agreement, if it makes false representation, and/or breaches an implied term, warranty or representation. UK franchisors usually ensure that their master franchise and development agreements are subject to English law and the jurisdiction of the English courts. They must, therefore, be aware of how English law regulates such things.

The Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977 may also afford redress to the franchisee in certain circumstances. The franchisee can sue for damages for loss of the bargain and also in certain circumstances for specific performance.

If a franchisor fails to fulfil his obligation under the franchise agreement he may well be liable not only for breach of contract, but also for negligence, or even breach of fiduciary duty in which case the franchisee also has a right against the franchisor in both damages and specific performance.

One particular source of protection afforded to franchisees which is often overlooked is that provided by the Company Directors Disqualification Act 1986. Section 56(1) of this is a complicated piece of legislation, but in basic terms it provides that a director of an insolvent company can be disqualified from being a director for a period of two to 15 years if he can be proved to be unfit to manage the affairs of a company. There is not a great deal of case law upon this point.

The Natural Life Health Foods case held that in some unusual cases the court might be willing to “pierce the corporate veil” and hold the director of a franchisor company liable for negligent mis-statements. However, on appeal the House of Lords found that this could only happen in exceptional circumstances which did exist in the Natural Life case.

The relevant point to note is contained in section 741 of The Companies Act 1985, which provides that a “director” includes any person occupying the position of director by whatever means, including a shadow director. A shadow director is defined as a person in accordance with whose directions or instructions, the directors of the company are accustomed to act.

Case law also uses the term “de facto director” which is basically the same as a shadow director. This means that it is quite possible that the franchisor could, in certain circumstances, be deemed by the court to be a shadow or de facto director of a franchise company, and if the franchisor behaves in a commercially culpable manner (e.g. does not perform his obligations under the franchise agreement) it may well be that he could be disqualified as a director.

A mere distributor or licensee could obviously show that any directions were given under a bona fide arm’s length commercial agreement. The franchisor, however, is far more intimately involved with the franchisee and has power to control most aspects of its business, including management and accounting procedure, coupled with powers of inspection.

Indeed, most franchise agreements provide for the franchisor to manage a franchisee’s outlet in certain circumstances, such as the franchisee’s incapacity or even death. This would mean that not only could an individual franchisor be prevented from being a director of his own company, he could also be disqualified from being a shadow director of another company, and therefore from being a franchisor.

This bar is not restricted to individuals, but extends also to corporate franchisors. Thus, the UK law arguably goes further than most others in this respect in providing protection for franchisees.

If it could be shown that the franchisor, in acting as a shadow director, has lacked commercial probity, or even been merely negligent, he could become subject to a disqualification order. This grey area of law really requires some clarification; ideally by franchisors being expressly excluded by statute.

However, until such amendment passes into law, the franchisor must take steps to monitor carefully its franchisees and ensure that it avoids acting without commercial probity or is negligent. It should also be noted that any dishonesty by the franchisor could be an offence under the Theft Act 1968, punishable by fines and penal sentences.

Legal regulation of franchisor disclosure

In a growing number of jurisdictions, the risk management process is in part proscribed by legislation. The legislature takes the view that appropriate disclosure is so important that it is something that needs to be specifically provided for in the law and cannot be left to voluntary codes, enforced by toothless trade bodies. Even though the agreement may be subject to English law, the franchisor must still comply with the local disclosure law.

The U.S.

The protection afforded to franchisees in the U.S. is often held up as a model which the UK should adopt by those favouring a statutory regulatory system. In the U.S, where franchise sales are seen as basically dealings in securities, there is a complex web of federal and state laws imposing differing requirements upon the franchisors.

At federal level, there are the Trade Commission’s “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures”, which have recently been amended and updated. These require franchisors and area developers to provide would-be franchisees and sub-franchisees with the franchise agreement, or related documentation, and a disclosure document.

Matters included in the disclosure document are the franchisor’s litigation and bankruptcy histories, the histories of the franchise to be purchased, details

of any initial and continuing payments, details of any obligations to purchase goods, details of available finance, the precise nature of the franchisee’s participation and a summary of the termination, cancellation, training, site selection and reporting provisions of the agreement.

It is common practice to use the Franchise Disclosure Document (FDD) developed by the American Securities Administrators’ Organisation in place of the actual disclosure document. Timing is crucial and disclosure must be made at the earlier of either the first “personal” meeting, or the time for making the disclosure (at least 10 business days prior to the execution of a binding agreement or the payment of consideration by the franchisee).

All related documentation, including the agreement to be executed by the franchisee, which is materially different from the standard form of agreement must also be registered within five working days before execution. Further, unless the FDD is used for disclosure purposes an “earnings claims document” must also be delivered to the franchisee if the franchisor makes projections of earnings or incomes of the franchisee or discloses history or information concerning the company and/or franchise operations. However, if the claims are made in the media the separate earnings claims document is compulsory, even if a FDD is used.

Most states also have registration/disclosure requirements as well as provisions for covering such things as termination and renewal. These requirements are many and various, and the interface between state and federal laws requires a great deal of consideration and keeps the American franchise lawyers well supplied with highly remunerative work. At present there are a number of proposals to increase this level of regulation still further.

The problems in such a system for UK and other foreign franchisors is that they find it difficult to deal with the administration and the highly technical rules tend to gain a momentum all of their own. The rules continually change as their shortcomings become evident.

Australia

In Australia, a specific franchise law was first proposed in 1986 along the American lines. However, at the time the development of Australia’s common law, which is basically the same as that of England, was thought to afford more than adequate protection to franchisees and so the proposed law was abandoned. A voluntary regulatory code was established following the recommendations of a parliamentary working party headed by David Beddell M.P. Its lack of success has been well documented. As a result, in June, 1998 a new franchise law, providing for mandatory disclosure by franchisors to their franchisees, was adopted. This is far less arduous than the equivalent U.S. law and currently has several exemptions that UK franchisors maybe able to take advantage of, however, this is likely to change in the near future.

Japan

In Japan, the Ministry for International Trade and Industry (MITI) has agreed a voluntary code with the Japanese Franchise Association which, if complied with, exempts JFA members from extensive laws covering distribution in general. The Fair Trade Commission has issued guidelines on desired disclosure by franchisors.

South Africa

The Franchise Association of Southern Africa (FASA) has been given powers to consider complaints by franchisees under the Consumer Code for Franchising introduced by the South African government. This approach has much to commend it as it combines the “teeth” of legislation with the flexibility and industry knowledge of a national franchise trade association. A new law is currently being considered.

France

It is widely stated that the Loi Doubin was the first franchise specific law in any EU member state. That is not technically correct. The Loi Doubin does not specifically refer to franchising. Rather, it focuses on networks which operate under a common brand. This neatly avoids the courts becoming embroiled in highly technical arguments over what is a franchise and what is not.

The Loi Doubin was adopted in 1989. It was enacted by Decree Number 91-337 of 4 April, 1991 and makes pre-contractual disclosure mandatory for most franchising operations. Although the law does not actually mention the word “franchise” its main impact is upon the franchising sector. It provides that any chain that is licensed to use a trade name, mark or sign on an exclusive or non-exclusive basis must comply with the disclosure requirements. Disclosure must be made at least 20 days prior to the signing of the franchise agreements. Breach of this will render the franchisor liable to a fine. It is not necessary to prove bad faith on the part of the franchisor to establish liability. If bad faith is established then the franchisor may be convicted of criminal fraud. Failure to comply with the disclosure requirements can lead to an order for damages being made by the courts.

By and large the Loi Doubin has been successful at ensuring that franchisors impart relevant information to potential franchisees before they sign up. This success has inspired Spain and Italy to take a similar approach to the regulation of franchising.

Spain

The story in Spain is somewhat different to that in France, even though the laws are partly based on the French law.

Despite the fanfare that heralded the introduction of Spain’s franchise laws in 1988, 13 years on they can only be seen as a failure and underline the need for any franchise law to be based upon rational assessment rather than emotional self-righteousness.

There is a disclosure and a regulation law.

The disclosure law applies to all franchises being sold in Spain, including master franchises. The disclosure requirements are detailed in Article 3 of the Royal Decree 2485/1988 and under Article 62 of Law 7/1996 of January 15, 1996.

The franchisor is required to provide basic information 21 days before closing a deal with a franchisee. By and large this law is complied with.

The Franchisors’ Registry was set up in 1988 as a national registry to guarantee the centralization of all relevant information about franchises operating in more than one autonomous region of Spain. The law aims for a transparent system, which enables potential franchisees to identify reputable franchise systems by reference to the register. However, to date this aim has not been achieved.

The original idea was to create a registry in each region under the jurisdiction of the Central Registry based in Madrid. This has yet to be achieved nationwide and several regions do not have a local registry.

Further, a lack of uniformity in criteria has meant that the registries have been operating without proper admission rules. As a result, the registries have admitted and, therefore, given credibility to systems which are not business-format franchises. This in turn has lead to the registries failing to achieve their aims of establishing a list of quality franchise systems.

Thus, ironically, a system designed to make life more difficult for disreputable franchisors is currently endorsing some of them as ones in which potential franchisees can safely invest.

To address some of these issues, the Spanish legislature recently passed Royal Decree 419/2006 which introduced amendments to the previous Royal Decree. The new decree creates additional disclosure requirements regarding the length of time the business has been active and any master franchise agreement. Foreign companies will have to translate all legal documents into Spanish and register them. Further voluntary requirements will include registering the company’s quality certifications, any mediation or ADR in use in the network, any observance of the Spanish Code of Conduct and any consumer complaints system.

In addition, the new decree creates procedural red tape such as an obligation to notify the Spanish Registry of changes of registered office, the closing or opening of franchise establishments, and an obligation to supply the Registry with an annual report on the franchise network.

A more considered approach to the practicality of the law before it was enacted could have avoided these problems. Other European jurisdictions should study and learn from the Spanish experience.

Italy

The Italian law defines franchising as a contract by which one party grants to the other, for a consideration, the use of a combination of intellectual property and/or industrial rights, know-how, and technical and commercial assistance, as well as the opportunity to be part of a franchising network.

The law stipulates that the contract must be executed in writing (otherwise is null and void), and the franchisor must have previously tested its formula in the market. The duration of the contract must take into account the time necessary for the franchisee to recoup the investment and, in any event, must be at least three years, except for early termination in case of breach of the agreement. The contract must specify certain basic matters. The franchisor must deliver a disclosure document to the franchisee at least 30 days before the date of execution of the contract.

Belgium

After several years of contemplating a wide variety of proposals – some bordering upon the bizarre – the Belgian Parliament has followed the lead of France and Spain by requiring franchisors to make formal pre-contractual disclosure to their potential franchisees. The proposed new franchise law came into force in February, 2006.

It requires franchisors to deliver a formal disclosure document to potential franchisees a month before they enter into it. Failure to do so will potentially render the franchise agreement unenforceable. The document comprises two separate sections, the first summarises the main terms of the agreement, and the second details “information relating to the correct evaluation of the commercial partnership agreement”.

In the event that the franchisor fails to comply with the disclosure requirements, the franchisee will have the option to have the agreement become null and void within a period of two years of the date of the agreement. If the disclosure document fails to properly summarise the terms of the franchise agreement, those terms will not be enforceable.

Both parties are placed under a duty of confidentiality as regards information that they obtain “with a view to entering into a franchise agreement, and may not use the information, either directly or indirectly, other than for the purposes of the commercial partnership agreement to be entered into”.

Romania

Romanian law also requires pre-contractual disclosure to franchisees. Unfortunately the law was adopted without a great deal of thought as part of a general attempt to present post-communist Romania as a modern country subject to the rule of law. As a consequence, the law has many shortcomings.

Sweden

After many attempts in the Swedish Parliament to enact a franchise law, a pre-contractual disclosure law was passed in 2006.

Risk management

What should UK franchisors embarking upon an internationalisation programme be doing as regards risk management? If there is a disclosure law in the target country the franchisor has no choice but to comply with it.

However franchisors must take responsibility for their own situation and properly manage the risks involved in recruiting master franchisees/developers, regardless of the absence of statutory disclosure obligations in many countries .

If the franchisor is at fault, then it should take the blame. Sharp practice amongst franchisors damages the reputation of franchising as a whole. However, legitimate franchisors must also accept responsibility for their own actions. They must take pre-emptive steps to ensure that there is no mismatch of expectation between them and their prospective master franchisees/developers, whilst at the same time not putting the latter off all together. It is a delicate balance. An art rather than an exact science. An international franchise dislcosure document is, therefore, essential.

The master franchisee for its part must take proper legal and financial advice on the franchise and speak to as many of the franchisor’s existing master franchisees as possible before entering into the agreement. The master franchisee must also be brutally honest with itself as regards to whether or not it is cut out for the role.

The franchisor must make sure there is as little scope as possible for misunderstanding. This means identifying the risk to which it is exposed through any alleged misrepresentation, reducing that risk as much as possible by implementing an appropriate disclosure procedure as a key part of its recruitment process, and managing the remaining risk by ensuring that the disclosure process is properly implemented on an ongoing basis.

So, in conclusion when UK franchisors decide to take advantage of foreign markets they must come to terms with the need for proper disclosure, not only in countries such as Italy, France, Spain and Belgium with “franchise laws”, but also in countries such as Germany, Austria and Switzerland which have so-called “soft” franchise laws that afford franchisees a level of protection that is far higher than that offered in the UK and other jurisdictions.

By mastering the gentle art of disclosure, UK franchisors will save themselves both time and money.

Importance of a good business plan

There is truth in the old saying “if you fail to plan, you plan to fail” especially when you’re starting a new business. Those who understand the benefits of business planning are more likely to be successful than those who react to day-to-day operational issues and are constantly fire-fighting problems. But planning a business is not a simple matter of scribbling down a few ideas. If a franchisee is going to make his plan work, a much more thorough approach must be adopted.

The value of a good business plan cannot be overstated. The initial objective of the document is to help you raise finance for the business and it will also help you understand what you wish to achieve from the business. It is an essential document as it enables you to review your performance against your projections, alerting you to anything that is not going according to plan.

The plan should demonstrate that you understand the business opportunity and the local market for your product or service. Banks can provide a business plan template for you to use. Accountants and Business Link advisers can also provide advice in producing a business plan, but remember it is your document and is too important to leave to someone else to write.

Essential information to include in your plan

A business plan is a document that provides an overview of the business, your objectives, market, staff, equipment and financial projections. It is often assumed that a business plan is just used to secure funding for the business. Whilst this is an important benefit of the plan, it can also assist with the management of the business, such as monitoring the ongoing performance of the business against the original benchmarks and identifying areas for development. The plan is a working document and should be regularly reviewed and updated as the business develops.

The plan is a useful tool to help gather thoughts and set objectives for the business. It should demonstrate that there is sufficient demand for the product or service offered and that you have a good understanding of the market. It should also set out the competitive advantage or unique selling points that the business may have.

Presenting your plan to gain maximum benefit

The presentation of the plan is important to create the maximum positive impact and you should practice its delivery before speaking to a lender so that you come across professionally. Think of those entrepreneurs on the BBC’s Dragon’s Den. From the outset, many don’t stand a chance of securing the investment they are seeking because their presentation is poorly conceived, or they don’t have a good understanding of the key financial information for their business. Consequently, they are unable to establish their own creditability and project confidence in their business.

Careful planning and preparation should put the franchisee in a better position to raise the required finance from a lender and operate his business successfully. The business plan is the most effective way to crystallise your business objectives and provide a sense of direction. Used in the right way, the plan is an essential tool. However, crucially no business plan should be set in stone and should be regularly reviewed as the business develops.

Understanding the bank manager’s assessment

Banks have a variety of tools to evaluate funding propositions and most will use a mix of credit scoring and checks with a credit reference agency, such as Experian, to access the funding risk.

Bank managers will usually base their lending decisions on the traditional canons of lending. These are followed, not only in the interest of the bank, but also of the customer, who can take comfort that full and fair consideration has been given to his application for financial support.

It is important that you are aware of the factors your bank will consider when making a lending decision so that your business proposal will hit the mark.

When you present to a bank you need to provide them with enough information and reassurance so they can mentally tick off each element of their aide-memoire and hopefully agree your proposal.

Canons of lending

Even though banks may use different methods, the basic principles are similar. The two most common mnemonics ingrained in the bank manager’s mind are CCCPARTS (Character, Capital, Capability, Purpose, Amount, Repayment, Terms, Security), and CAMPARI (Character, Ability, Margin, Purpose, Amount, Repayment, Insurance).

Character: Ultimately banks will lend money when there is a very good chance that they will be repaid, so establishing whether the customer is trustworthy and their track record is an important consideration. If there are any doubts over the customer’s character the lending proposition will not proceed beyond this stage and be declined.

The bank will look at whether the customer is making exaggerated claims that are too optimistic, or has adopted a more reasonable and conservative approach. The repayment of any previous borrowing will be looked at, and for new customers bank statements will be requested to assess how they have conducted their accounts in the past.

Ability/capability: The bank will look at the borrower’s skills and experience as well as their drive to build a successful business. It is rare that one individual has all the skills required to run a business and consideration will be given to the abilities of its management team and key staff, and any potential weaknesses.

Margin/terms: The interest margin and terms offered by the bank will reflect the risk involved in the lending. Proposals that include adequate security are likely to attract lower interest rates than unsecured deals. The amount and complexity of the work involved will determine the level of fees. Remember, however, there may be some room for negotiation with the bank in certain instances. When compiling your financial projections remember that rates are presently very low, but set to increase. Therefore, you should assume a higher rate in your forecasts to allow for likely increases in the base rate.

Purpose: The bank will need to establish that the purpose of the loan is an acceptable risk and in the customer’s best interests. In their optimism to press ahead, customers can overlook potential problems, while the lender can bring a degree of realism to the proposition.

Amount/capital: The lender will consider whether the amount being sought is appropriate and may challenge any assumptions. The amount requested should be in proportion to the customer’s own stake. A reasonable contribution from the borrower will show its commitment to the bank.

In the case of investing in a well-established franchise, most franchise specialist banks will consider financing up to 70 per cent of the total investment costs. The borrower should also have a contingency reserve in case the business takes longer than expected to get off the ground. You should provide the bank with a full breakdown of your assets and liabilities as well as your income and expenditure requirements.

Repayment: The repayment source of any lending needs to be established at the outset. Repayment will usually come from trading profits and this is where your projections will be thoroughly tested by the bank. Historic trading figures and up-to-date management accounts are essential for existing businesses.

New start-up businesses will be projection-led and open to challenge from the bank manager. A franchise specialist bank is likely to have experience of existing franchisees in the system who bank with them and be able to draw on that knowledge to consider the likely repayment capabilities.

Insurance/security: Security is usually required as a secondary repayment source for the borrowing. Banks don’t lend against the security alone and the canons of lending need to be met, irrespective of the available security.

The bank will not be in a position to release the agreed funds until all elements of the security have been completed. This may take several weeks and applicants need to work with the bank to ensure that the procedures are completed within realistic timescales. The bank will also look at any potential issues resulting from any gaps in the borrower’s insurance provisions which may impact of their ability to repay the agreed finance.

It is unlikely that the actual trading performance will exactly match the borrower’s projections and, therefore, the bank will regularly monitor and review progress. The earlier that problems are identified, the better the chances of the bank being able to offer practical advice to overcome them. An understanding of the borrowing requirements and credit risks associated with the lending are essential to the bank manager in arriving at his decision to lend. Put yourself in his shoes and consider the canons of lending set out here. This will give you the best chance of securing the bank’s support.

However, it is inevitable that disputes may arise and a breakdown in the relationship occur, but this need not be acrimonious. It is important that the franchise agreement deals with this area adequately and that lines of communication are kept open between the parties.

When problems first arise, swift and appropriate legal advice can often resolve most issues. Nevertheless, there are occasions when the relationship comes to an end. This can occur in the following ways.

• Where the franchisor breaches the agreement.
• Where the franchisee breaches the agreement and the breach is either not capable of being remedied, or is not remedied, even if the franchisee is given the opportunity to do so.
• On expiry of the fixed term of the agreement with no right of renewal.
• On the sale of the business by the franchisee to a purchaser who is then granted a franchise by the franchisor.
• Where the franchisor becomes insolvent and a liquidator/receiver is appointed.

This article seeks to give a general overview of the usual provisions found in franchise agreements dealing with the consequences of termination and the general remedies available.

On termination, the parties’ objectives will inevitably conflict. The franchisor will want to safeguard its assets, know-how and reputation. The franchisee will want to maximise the value of its business and minimise the extent of any restraints on its future business activities.

It is important that a franchisee understands from the outset what exit routes are available to it. Most agreements expect a franchisee to commit for a minimum number of years without a right to terminate. Therefore, if a problem arises and a franchisee wants out it is rarely in a position to simply down tools and walk away.

The process of termination can be extremely costly, particularly where the breach is contested, and it is worth exploring alternative ways of settling any disputes.

Dispute resolution

In order to try to reconcile the parties’ interests and maintain the integrity of the franchise network, it is advisable to attempt to resolve such disputes without referring the matter to the courts. In these situations, mediation or arbitration can be used if direct negotiation has been unsuccessful.

Often the franchise agreement will provide for any disputes to be referred to mediation or arbitration, rather than litigation. Even where there is no alternative dispute resolution clause the parties will often agree to mediate or arbitrate, rather than litigate, to avoid costs. This approach is encouraged by the courts.

These alternative routes are also supported by the BFA, which operates its own dispute resolution procedure. This is both a mediation and an arbitration scheme.

The mediation scheme is intended to complement the arbitration scheme and can be used prior to, or at any time during, arbitration or litigation. The advantage of mediation is that it is a more informal process than arbitration and can reduce hostilities and help to preserve relationships.

Mediation is essentially a structured negotiation between the parties in which the mediator (whose time is usually paid for equally by the parties) is an independent third party who facilitates the negotiations on a without-prejudice basis. The parties are not bound to settle their dispute, but should they do so this will be recorded in writing, and then be final and binding. Any such settlement can be enforced, but it is not the mediator’s job to make any finding or award.

Arbitration, unlike mediation, is far more formal in terms of the procedure followed and the manner in which it is conducted. The arbitrator makes an award that is final and binding (although there may be limited rights of appeal) and the award is enforceable. The arbitrator will need to be paid and the costs can be awarded against the parties as determined by the arbitrator.

The advantage over mediation is that the arbitrator will usually have knowledge of the subject area and an award may well be sought by one of the parties.

The advantage of both schemes is that the dispute can be resolved in private at a time and place convenient to the parties.

Consequences of termination

Whatever the circumstances surrounding the termination, a well drafted agreement should set out clearly the consequences of termination. Firstly, it should deal with the mechanics of severing the relationship and the protection of the franchisor’s name and goodwill. Secondly, it should protect the franchisor’s intellectual property and prevent a departing franchisee from using its trade secrets in order to compete unfairly with the franchisor and the other existing franchisees.

Mechanics

The franchisor will want to be sure that there is a clear and obvious break with the franchisee, whilst at the same time ensuring that customer contact and continuity of services are maintained with the existing customers. It is, therefore, vital to obtain all the relevant customer lists of the franchisee’s business and to contact customers directly. This should not be left to the last minute, but should be collected regularly throughout the agreement.

In order to ensure that all association between the franchisor and the departing franchisee is removed, the franchisee should be required, amongst other things, to make the following changes.

• Cancel any relevant trade mark licence recorded at the Trade Marks Registry.
• Change the fascia, décor and shop fitting of premises and the livery of any vehicles to remove the visible connection between its business and the franchise.
• Return all advertising, packaging, marketing and promotional materials.
• Cease to use all stationery, literature and other materials using the franchisor’s trade marks and service mark, trade names and other reference to the franchise.
• Return the operations manuals.
• Cease to use the franchisor’s system.
• Cease to use the franchisor’s copyright material.
• Where relevant, cease to use all telephone numbers and land lines.

Settlement

In severing the relationship there may be other considerations to be taken into account, such as property. Where location is important for the business, it is increasingly common for the franchisor to either acquire the premises in question and sub-let them to the franchisee, or have the option to take over any lease or termination. This will obviously have an impact on the termination.

In addition, where a departing franchisee is contractually required to sell to the franchisor, all its equipment and stock of products it is essential that the franchisee obtains a fair price for the goods which would otherwise be of little use to it.

Where possible it is usually beneficial to both parties for a settlement to be reached in an amicable way. This avoids any loss of reputation for the franchisor and therefore for the franchise network as a whole and it enables the franchisee to salvage what it may from the breakdown at a reasonable price.

It is essential that the agreement has been appropriately drafted for the franchise in question in order that both parties may know exactly where they stand on a parting of the ways and avoid any unnecessary acrimony.

Occasionally, the agreement contains a right of buy-back of the franchised business on the part of the franchisor, which sets out the basis upon which a value will be calculated for the business. Usually no value is given for goodwill, and assets are bought at the written down value in the accounts or at cost. A franchisee should be aware that it will not receive very much for its business where a termination is acrimonious. It has a better chance of persuading a franchisor to pay more where the relationship can be maintained at an amicable level.

Restrictions on trade

The agreement will usually contain undertakings on the part of the franchisee, agreeing to restrict the way in which it intends to conduct its business activities on termination. This often comes as a surprise to the franchisee.

These restrictions tend to vary from one agreement to another, but in essence they deal with the same objective, which is to ensure that the franchisee will not use the knowledge it has acquired as a franchisee to compete unfairly with the franchisor, or any of its franchisees, following termination for a stated period and within a certain area.

These restrictions require careful drafting, particularly in terms of the time limit and the radius covered. Although the law recognises the need for such restrictions, they must be reasonable both as to time and the area of operation in order to be enforceable, and the franchisor must be able to show it has a legitimate interest to protect. The franchisor has the right to keep and protect what it rightfully owns, but at the same time the departing franchisee must have some freedom to trade and/or to work in its chosen occupation, particularly if this is its only livelihood. This freedom cannot be fettered unreasonably.

Establishing the correct period of time and radius is a matter requiring careful consideration having regard to the nature of the business and its area of operation, and whether it is the ex-franchisee’s only means of earning a living. These restraint of trade clauses have been the subject of much litigation and thankfully the case law is extremely helpful in this area.

Where a franchisee is in breach of such restrictions, franchisors can and do take out injunctions to protect their position and, therefore, it is important that a franchisee is fully aware of the extent of its obligations when entering into the agreement.

Usually there is an additional restraint on franchisees, both during and after termination of the agreement. This is the obligation to keep all intellectual property of the franchisor, including trade secrets, systems, and know-how, secret and confidential, unless in the public domain. This obligation is not usually subject to any time limit as long as the information concerned is shown to be confidential and not generally accessible.

It is this area, and the enforcement of the restrictive covenants, which most often become the subject of court proceedings. At the first sign of any unauthorised disclosure of information or trading, prompt legal advice should be sought to protect the parties’ interests.

Failure of the franchisor

Where a franchisor becomes insolvent, the agreement will not automatically come to an end unless it contains an express provision to this effect. If the franchisor is a limited company it will usually go into administration, receivership or liquidation in which case the administrator/receiver/liquidator will take control of the assets, subject to the rights of the franchisees.

These assets will include all the intellectual property owned by the franchisor in the franchise, together with the franchise agreements (i.e the trade marks, logos, trade name, brand names, copyright in all the literature, trade secrets and the method of conducting the business), any other know-how transferred to the franchisee (unless it is already in the public domain), and usually the goodwill associated with it.

The primary objective of a receiver or liquidator is to protect the assets. As, in most cases, the franchisor will be receiving an income from its franchisees, it is very much in the interests of a receiver or liquidator to ensure that the franchisees continue to operate their businesses as usual. Therefore, franchisees should be allowed to continue trading despite the failure of their franchisor.

The receiver/liquidator also has to realise the best possible value for the assets. This will obviously be enhanced where the franchised network continues to trade.

The network might be bought from the receiver/ liquidator by someone in the same or similar line of business as the failed franchisor although this is not always ideal. Another franchisor may feel there is too much duplication between its network and that on offer. In addition, the franchisees may not wish to deal with another franchisor.

It is obviously important that a prospective purchaser establishes from the outset whether it could work with the franchisees of the failed franchisor and a canvass of the franchisees is usually the first thing a prospective purchaser should carry out. The franchisees may well be reluctant to contract with another franchisor, given their past experience.

Alternatively, one or more of the franchisees could join together and buy the assets. This is usually more successful where the franchisees have taken swift legal advice at the first signs of trouble, and are well prepared and organised. Not all franchisees will necessarily wish to be involved, but this does not prevent a handful of franchises taking over the position of the franchisor.

Once the franchisees have decided amongst themselves the best means of acquiring the assets they will need the advice of a skilled negotiator when dealing with the receiver/liquidator as there may be more than one prospective purchaser in the picture.

Where there is no prospective purchaser for the assets and no group of franchisees willing to put themselves forward then all franchisees in the network should be able to purchase from the receiver/ liquidator some of the essential features of the franchise, such as the copyright in the manual, trade mark and so on at a relatively low price which when shared out amongst the network would be negligible.

From that point on, the franchisees could carry on the business without paying any further franchise fees, but would benefit in co-operating with each other to preserve continuity of image and methodology.

Conclusion

As can be seen, it is vital that the right advice and appropriate action is taken by the parties at the critical time to ensure that the best possible outcome for their businesses can be realised. A failure to take such advice can lead to a lost opportunity and increased costs. A parting of the ways need not, after all, be disastrous.

However, the process of turning a business into a franchise begins long before the first advertisements are placed for potential franchisees. The people who run the business, whether they are main board directors of a Plc, or are virtually a one-man band, must first gain a full understanding of franchising, including its advantages and disadvantages, and its likely effect on their existing operation.

Only when fully armed with all the relevant information should a business make the decision to become a franchisor. This information includes hard elements, such as the financial aspects, and the softer, personal elements of the unique franchisor/franchisee relationship.

It is important to look very closely at the more personal elements because there is much more to building a successful franchise than the cold legal agreement and financial projections. Whilst advice on these matters from properly qualified professionals is, of course, essential it must be considered in tandem with issues concerning human resources and personal development. Make no mistake, if a business becomes a franchisor, personal development is the name of the game.

Whatever it is you do now, whether you are a restaurateur, printer, carpet cleaner, car tuner, fashion retailer, or deliverer of parcels, your business will change when you become a franchisor. It will then be all about recruiting, training, monitoring and motivating people who want to run a business under your name, using your system and operated to your standards.

They will expect leadership and direction; help when they want to expand, or when they meet the inevitable problems; on-going training and marketing support; and the product or service development to keep their business at the forefront of its marketplace. They will also expect you to create and maintain standards, both in your own business and throughout the network.

As this is what you will have promised them when they were considering joining you as a franchisee, you had better deliver it. Whatever happened, you may ask, to running a restaurant, printing, cleaning carpets, tuning cars, and so on?

If you are ready for this fundamental change, let us look at how we decide whether a business is franchiseable. We will examine firstly the mechanics and then the cultural implications.

Five-star franchising

Just about any type of business that operates as a branch network has been already franchised somewhere in the world.

In the U.S. for example, you can be born in a franchised maternity hospital, buy just about every product and service you will need in your lifetime from franchised outlets, then be seen off by a franchised undertaker, and finally buried in a franchised cemetery. However, not every business that has tried to franchise has been successful, and this is due to a number of reasons. To create a successful franchised network certain key elements need to be present. These are:-

• A business with a clearly defined image and system of operation, both at branch and head office levels.
• A business with a proven and successful format suitable for franchising and with a product or service that has stood, or will stand, the test of time.
• A business that is easily duplicated and easily learned
• A business that generates enough profits to support both the franchisor and the network of franchisees.
• A business which has, or can adapt to, a culture of mutual respect and support, and in which it is clear who is responsible for what, and how often, and how well, they will perform their obligations.

Image and system

The clearly defined image and system are what we call the intellectual property. This includes the trade name, the method of operation and the way in which the various elements of the business come together to make up the franchise formula. None of the elements of the package need to be individually secret. What matters is the way that the franchisor has combined them to create a successful business system.

Naturally, the trade mark or name has to be owned by the franchisor as he is licensing others to use it, but do not worry if your name is not yet well known. That will not stop franchisees from joining you. After all, even McDonald’s and Marks & Spencer started with only a single outlet.

All the elements of the package from the design and layout of the premises, through marketing campaigns, to accounting and administration will be detailed in the franchise manual, and it is the system in the manual that the franchisee agrees to operate.

Proven format

Pilot operations prove that the concept works and it is the evidence of their success that will convince your first franchisees that they should choose your franchise. Even if you have run company-owned branches for years, you must be aware that things will change when you franchise and you must be prepared to run pilot units at arm’s length.

This is just as important if you currently have company-owned outlets which you are planning to convert to franchises and even if the franchisee is going to be the existing branch manager. Something different will happen when it becomes a franchise, so it is wise to find out what that is before you take the plunge.

Pilot units should, of course, mirror the proposed franchised outlet as far as possible in terms of size, location, catchment area, population profile, staffing and so on. It is no use doing brilliant business from a site in London’s Leicester Square and then expecting a franchisee to be equally as successful in the high street in Leicester. Ideally, you should pilot the concept in two or three places for at least one complete trading cycle.

Pilot operations help to prove that what you thought on paper will work in practice. If it does not, then you still have the chance to adapt it before offering it to franchisees. Pilot units also give you the opportunity to write the manual from practical experience rather than theory.

Easily duplicated

Depending on how many franchisees you need to properly service your potential market, you will not want to have too much difficulty finding premises, or people to join you as franchisees.

If there are a limited number of sites suitable for your business, or it needs particularly unusual conditions (say a constant supply of fresh spring water) then it will not be easy to duplicate in sufficient numbers to support a network. Similarly, if it calls for special skills which few people possess, say something particularly artistic or creative then franchisees will not be able to learn how to do it. Every rule has its exceptions, but generally speaking the easier it is to duplicate and learn the business, the easier it will be to franchise it.

Profitable

The whole area of profits and fees is what we call structuring the franchise, and it is one in which you will need professional advice. Do not just look at a similar business and simply decided to charge the same franchise fees.

Whatever percentage they charge for their management services fee and advertising levy, or the size of the mark-up they charge on supplies, will probably not be appropriate for you, and it may not even be right for them either.

A franchising feasibility study has to consider many things. Having sorted out whether the business is proven, and easily duplicated and easily learned, it is then necessary to look at the structure. How big is the market? How much business can the proposed size of outlet handle? Consequently, how many franchisees will we need?

Having decided the number, what support staff and structure will you need to recruit and support a network of that size? Can the business make enough to satisfy the franchisee, and give the franchisor a profit?

These and many other considerations are best discussed with someone who has franchising experience as it is easy to overlook simple items when you have not had experience as a franchisor.

Naturally, it is sensible to work out the franchisee’s finances first. After all, if it does not work for the franchisee, it will never work for the franchisor. If things look good for the franchisee, then go on to work out your finances as a franchisor. Ideally, you should prepare a three-year profit-and-loss and cash-flow forecasts for both your franchisees and yourself. These can later be used as the basis for business plans, both for raising finance and the on-going monitoring of the business.

It is vital to get the structure right. This may seem obvious, but if one or other of the parties sees the other making all the money or, indeed, if neither of them is making enough, the relationship will come to an end.

The business, therefore, has to generate enough profit for the franchisee to make a decent living and pay back whatever he borrowed to start the business, and also make some more on top to re-invest in future improvements. Finally, the business must contribute enough to the franchisor for him to do the same, and in addition provide on-going support to all his franchisees.

So if your business has a low margin it is likely to be difficult to franchise successfully. It also really goes without saying that if your existing business is not making sufficient profits, franchising will not offer a way out of the problem. In such a situation, you must first put right whatever is wrong and then use franchising to build on your new success.

Franchising culture

None of the above will work if you do not get the relationship right and build a business based upon mutual trust, respect and support. To support franchisees, it is essential that franchisors and their support staff understand the unique relationship between the franchisor and franchisee.

Like all relationships, both parties in franchising have different motivations for becoming involved, and there are advantages and disadvantages on both sides.

For the franchisor, the benefits have mostly to do with using other people’s money to expand the network quicker than would otherwise be possible, whilst having less involvement in the day-to-hassle of running branches. The disadvantages are having to accept that the bulk of the profits from the branches will go to the franchisees, and learning how to deal effectively with people who are using your name and system, but who own their own businesses.

Some research says that it is a relationship which is becoming increasingly attractive to many businesses as proved by the fact that more franchisors come to the market every year. However, other research says that as many as two-thirds of franchisors drop out within the first 10 years.

There may be any number of reasons for firms dropping out, and they are not all due to failure or disappointment with the system, but it is likely that many of those who did withdraw did so because they had failed to understand the principles of good franchising practice before they started and were subsequently unable, or unwilling, to get to grips with the all-important question of the franchisor/ franchisee relationship.

As in many relationships, the major cause of failure is often due to the failure to communicate. It is the franchisor’s job to communicate what the network is trying to achieve; how it will be done; who is responsible for what; and by when it should be done. He should set an example by his own actions, and motivate and encourage franchisees to play their part in making the system successful. Not many networks fail because of the franchisees.

Assuming the franchisor has properly piloted and proven his system, he then needs to understand the motivation of franchisees for choosing this particular form of self-employment. Research tells us that at the top of the list comes reduced risk, marketing and training support, the fulfilment of a long-term desire to have their own business, and trading under an established name. At fifth place is the level of prospective income.

If you have recruited your franchisees, or sold your franchise, on the strength of the support you will provide, that support had better be there and it had better be good.

The first step towards mutual understanding is for each party to accept their individual and joint responsibilities.

Broadly speaking, the franchisor is responsible for marketing and developing the network and its products or services; assisting the franchisee to be profitable; and creating and maintaining standards. The franchisee is responsible for upholding the good name of the franchisor; operating in accordance with the agreement and manual; and maintaining and improving standards. Jointly, the responsibility of both parties is to build a network with a defined image and standards, under a recognised brand name.

Franchisees must be made to understand from the outset that they are being allowed the opportunity to operate a proven business system, using an established name. They are not opening a business in which they are free to do their own thing. The position of franchisees is, in fact, unique in the field of commercial relationships.

Franchisees are not employees, although they work to instructions and will hopefully have been recruited with as much, if not more, care. They are not customers, although they will have been, and continue to be, sold products or services. They are not, whatever the PR message may say, partners. Not legally, anyway.

They are, in fact, people who have trusted the promises made by the franchisor and his staff to the extent that they are prepared to devote probably their entire financial assets and most of the waking life to the pursuit of the promised opportunity. In return, as we have seen, they expect to receive the support that they have been promised in terms of marketing assistance, training, business planning, product development, and general business advice.

The franchisor’s support staff must realise that their role is to deliver what the franchise sales staff have promised. The recruiters for their part must be careful not to promise more than the franchisor is capable of delivering.

Becoming a franchisor

Franchising is about supporting franchisees in order that they can operate a proven system, and that support must be available to the very first franchisee who joins the network. It may not then be necessary to add to the initial support staff until there are 15 – 20 franchisees, but they all need to be there at the start. If the early franchisees are not supported, they will not succeed and it will then become increasingly difficult to sign up others.

Similarly, the operations manual and legal agreement must also be in place at the start, as must the systems for monitoring and managing the performance of franchisees. Franchising, therefore, requires considerable up-front investment by the franchisor before there is any income stream.

Agreement and manual

The agreement and manual are the documents which lay down the ground rules which govern the relationship. They are linked together through clauses in the agreement, and both need to be professionally prepared by recognised franchising experts.

There is a substantial cost to be met in preparing these documents, but over the life of the network this will appear negligible, and will usually be amortised from the fees of the first few franchisees. Both documents must be properly prepared. Cutting costs here will create problems down the line which will prove far more expensive than taking proper advice at the start.

Support staff

Having agreed that franchising has its particular skills, the staff involved in the franchise operation should either have, or quickly acquire, those skills. Basically there are two choices, either recruit experienced franchise managers from outside, or have your own staff trained in franchise management.

Formal training is available from the Franchise Training Centre via a series of modules covering marketing the franchise, recruiting franchisees, monitoring franchisee performance and motivating franchisees. Delegates who complete all modules can choose to go on to prepare a dissertation showing how what has been learned has been successfully transferred to the workplace. That results in the award of the diploma in franchise management, which in turn has been accredited by Middlesex University and provides academic credits towards an MA work based learning studies (franchising). Details are available at www.franchise-consultants.com

Prospective franchisees may soon be asking for evidence of such qualifications being held by the staff of the franchisor they are planning to join, and perhaps choosing to go with a different network which has more evidence of such a professional approach.

Whether there is just one manager doing it all, or a separate one for each of the support functions, staff need to be proficient at recruiting, training, monitoring and motivating franchisees, with all the technology, knowledge and inter-personal skills called for by such responsibilities.

Recruiting franchisees

A franchisor has two marketing responsibilities – one for continuing to market the product or service; the other for marketing the business opportunity and recruiting franchisees. These are not the same, and require different approaches. Presumably, if he has established the business, the franchisor already knows how to market his product or service.

The feasibility study and franchise plan will have established how many franchisees are needed and where they should be located. The manual will make it clear what is required of the franchisee in terms of duties, responsibilities, knowledge, skills and attitude.

The franchise marketing plan brings the two together, and the franchisor needs to choose people, or perhaps companies, who fit a pre-determined profile and have the ability to succeed. It usually proves disastrous to simply appoint anyone who has the money to buy the franchise and to locate them wherever there is a blank space on the map.

There are any number of ways of reaching potential franchisees, but no way that is right for every franchisor. Having established a clear idea of what a prospective franchisee looks like, it becomes easier to decide where to look for them.

Professional advice will help to ensure that the message is properly targeted, leads are handled effectively, and procedures are implemented to accept or reject applicants. The skills required by franchisee recruitment personnel include marketing, selling, business awareness, negotiation, and legal and financial understanding.

Business plans

Subject to the usual lending criteria, all the banks are keen to lend to franchisees of a properly-structured and proven franchise. Most franchisors present their opportunity to the franchise sections of the banks to clear the way for later applications by their prospects.

Naturally, the franchisee needs his own business plan, based on the experiences of other franchisees in the system and franchisors, or their approved third parties, can help with the preparation of these plans.

Agreeing business plans (both action plans and financial projections) with franchisees allows more sensible discussion of progress once the outlet is up and running, and most franchisors will insist on franchisees using a particular system of accounting. This can even be overseen by a professional adviser who monitors the performance of the entire network, rather than leaving it to in-house staff.

Once agreement to go ahead has been reached, the franchisor will commence his set-up and support procedure. This will vary according to the type of business and may include help with locating and acquiring a suitable site; converting and equipping premises or vehicles; preparing a marketing launch package; and providing initial stock.

Whatever the business, it will include training for the franchisee, and probably his staff, in every aspect of the business. This may be carried out either in classroom style, or hands-on at an existing unit, or in a mixture of the two.

Training is the very essence of franchising. It is how the franchisor passes on the proven format which he has developed and in which the franchisee has decided to invest. Having successfully completed initial training, franchisees should be able, or indeed required, to attend further training on a continuous basis.

On-going support

Franchisees expect and are entitled to continuing support in operating their business, whether this be concerned with new products or systems of operation, training, assistance with business development, encouragement during times of difficulty, and help in finding a purchaser for their business if they want to move on.

The franchisor must learn how to both motivate and monitor franchises – motivate to encourage them to do better, monitor them to ensure that they are maintaining standards, both for their own good and that of the network as a whole. There are numerous techniques to achieve these aims, and professional advisers can explain how to implement them.

Conclusion

A business can probably be franchised successfully if it is proven and successful in an established format; capable of being easily duplicated and easily learned; likely to be profitable for both franchisor and franchisees; and the management is prepared to accept considerable operational and cultural changes.

Franchising in the UK has come of age, and there is now a wealth of professional guidance available to prospective franchisors. To not take advantage of such advice may turn out to be not just remiss, but fatal to the businesses of the franchisor and his franchisees.

If it is operated properly, franchising is a superb way of building a business in which everybody wins – the franchisor, the franchisees, and through the franchisees’ personal commitment to the success of their local outlets, the customers.

1. How the franchisor obtains its income.

2. The pilot stage and related finance.

3. The development stage and the franchisor’s financial plan.

1. How the franchisor obtains his income

The franchisor derives its income from two principal sources – the initial franchise fee and on-going fees – and one of the most difficult problems at the planning stage is deciding at what level these fees should be pitched.

The franchisor has to gauge precisely what is a fair and reasonable financial balance between what it receives and what the franchisee retains. Such a balance is of paramount importance to achieving the ultimate objective of a partnership for profit.

The difficulty is in deciding just what is, and what is not, fair. Account has to be taken of the fact that the income to the franchisee needs to be at a level which is sufficient for it to live and pay its mortgage etc. and that the franchisor’s income is sufficient to cover its costs and make it a reasonable profit. The franchisor also needs to consider the fees in relation to other similar franchises. If they are more expensive this could put off a prospective franchisee.

In the final analysis, the franchise should be constructed to ensure that the franchisor receives an acceptable return on the capital employed, and the franchisee equally should be able to obtain a return on its investment, comparable with opportunities available elsewhere.

The fee structure which is imposed within any franchise should not be negotiable by the different franchisees. All of them must be recruited on the same basis and the franchisor must be completely open in explaining to the franchisee its exact sources of income. Failure to do so can only lead to subsequent suspicion and discontent.

Initial fees

In essence, the initial fee should take into account the cost of constructing the franchise concept, both initially and on a continuing basis. The amount should be apportioned among the number of franchisees which it is anticipated will be recruited over a start-up period of, say, 3-5 years.

Certainly, there should be no appreciable profit for the franchisor included in this initial fee, and the fee will also need to stand comparison with other franchise opportunities on the market.

In the course of time, it may be possible to increase the initial fee by modest proportions to reflect the growing strength and success of the franchise, and it would certainly be prudent to review the figure from time-to-time to ensure that it is increased in line with inflation. The franchisor, however, should remember that its prime task is to help its franchisees into business effectively, whilst keeping the investment level as modest as possible.

The franchisor must realise that it will be faced with expenses in the early stages which its income from the franchise will not cover at that time.

However, its income should grow faster than its expenses. For example, the number of staff required to cope with 15 franchisees may be the same number as that required to service as many as 35 and each franchisee will represent additional income to the franchisor. This factor should be reflected in the development plan.

On-going fees

It would be very unusual for the initial fee to be the only fee income which the franchisor will ever receive, otherwise it would have no capacity to finance the continuing relationship. On-going income is provided by the continuing franchise fee.

It is normal for the franchisor to charge a straight percentage fee on the gross sales achieved by its franchisees (known as the management services fee), but in some cases, particularly where trade marked goods are involved, the franchise agreement compels the franchisee to buy goods from the franchisor, or a nominated supplier of the franchisor.

Where there is a mark-up on goods, the franchisor is, in fact, receiving its franchise service fee by taking a larger gross profit on the goods. If a nominated supplier is used, the franchisor can obtain its income in the form of commission from the supplier.

In practice, from the financial point of view, the level of management services fee taken from the franchisee usually falls within the range of 25 – 35 per cent of the franchisee’s projected net profit figures, excluding service fees, personal drawings, tax, depreciation and finance charges. However, this is not a hard and fast rule.

With franchising we are not dealing with a precise science, nor a system with rigid guidelines. The key consideration in assessing the franchisor’s on-going income is the bottom-line figure available to the franchisee after the management services fee has been paid, or the mark-up applied to the goods purchased.

Whatever income method is adopted and, generally speaking the turnover based level is the most common, the franchisor should tell the franchisee clearly how it obtains its income. It should correctly calculate all initial and on-going fees and be able to demonstrate that it is capable of providing its franchisees with the level of support, guidance and expertise which will enable the development plans to be achieved.

Other sources of income

In theory, the franchisor does have the opportunity of deriving extra income from other sources, including the items in the start-up package which might include the lease of premises and/or equipment, and the sale of equipment.

In most cases, these items or services will be passed on at cost with the addition of modest handling charges or administrative costs which are perfectly legitimate. In those relatively exceptional cases where the franchisor is supplementing, or substituting income from other sources for traditional fee income, then it is essential that it is completely overt with its franchisees from the outset.

Fixed and minimum fees

In some instances, a franchisor may wish to impose a fixed level of management services fee. Where that fee is pitched at a set level, regardless of the turnover or the level of maturity of the business, then problems could arise.

Firstly, they may be caused by the franchisee having to struggle to meet the fixed fee in the early days when his turnover is relatively low and secondly, the franchisor will find that it is unable to benefit from the increased business as the franchise develops. In this latter case, the level of support the franchisor is able to give to the franchisee may suffer. On the other hand, with a cash business this method could be the only way of ensuring it receives what is due, as a franchisee may under declare its turnover and the franchisor will be unaware.

2. Pilot stage and related finance

New franchises principally come from two sources. Firstly, there are existing companies, which wish to expand. This may include overseas businesses that have decided to franchise in the UK. Secondly, there are individuals, partnerships or companies with an idea which, when proved, will be capable of being franchised.

The former is the more common and perhaps more likely to succeed. Either way, there are two principal stages in the franchise expansion programme – firstly, the pilot operation; and secondly, the development process. In this section we shall look at the pilot operation.

The main initial task of the franchisor is to develop a tried and tested formula which will be capable of creating a successful business for the franchisees. As I have indicated earlier, whilst the franchisor will derive some income from selling franchises, it will normally only be sufficient to repay it for setting-up the early franchisees in business.

The break-even performance and in time return on investment, will only come from successful franchisees contributing their on-going management services fee or, in the less common situation, the mark-up on goods.

To develop an idea into a franchise, it is essential, therefore, to prove that it can create a successful business and it is the responsibility of the potential franchisor to invest its own money to provide that proof to everyone’s satisfaction.

An existing company may need to open a new outlet or outlets to re-prove the system or, alternatively, designate an existing branch for this purpose.

The new company will need to start from scratch. It is essential that the pilot operation is a typical outlet as to size, market area, cost, etc. and one which can be cloned in due course when the franchise is ready to be launched.

Therefore, it is difficult to give guidance on the costs of a pilot operation as it will depend on how much expenditure is necessary to maximise the performance of the outlet to make it capable of being franchised. If the company has a sound existing business which needs little in the way of adaption, the costs can be relatively modest. Where the adaption required is greater, or much experimentation is needed, the costs will be higher, especially if a number of pilot operations have to be run.

In the case of the established business which is planning to launch into franchising, finance for the pilot operation should not create too many problems for the bank as it falls within the normal scope of business – financing a business with defined assets and a defined source of income.

In the case of a new venture, financial support is not so easy to obtain and the banks will take a more cautious attitude to both the size of the cash contribution and the security cover required.

The financial requirements of the pilot operation are often below the threshold levels of venture capitalists, but if conventional bank finance is not available, a possible alternative is to take advantage of the Government-backed Small Firms Loan Guarantee Scheme.

Whoever is providing the finance will, of course, need convincing that the product or service will be successful in the marketplace and over a long term.

What is it then that the pilot operation should set out to achieve?

Firstly, it must prove that the product or service will satisfy a continuing consumer demand. It must also demonstrate that the technology and expertise necessary to run the business can be transferred to a franchisee, who has little or no experience of the business. In financial terms, it must show that a typical outlet is capable of providing a return of the investment within a reasonable term, say 2 – 4 years, depending upon the basis of the calculation.

If such a financial performance cannot be achieved, the business opportunity will be unlikely to attract investors and will not be competitive with other such opportunities.

The franchisor from its experience with the pilot operation should be able to give a guide to would-be franchisees of the profit and loss profile of the business. Usually, Year 2 would show a possible growth pattern, based on the business becoming established in its particular locality.

3. Development stage and the franchisor’s financial plan

Having established and financed the concept and proven its viability, the next stage is the development plan leading to a possible need for franchisor funding.

From a financial point of view, the pilot operation and the on-going plan are two distinct and separate considerations. It may be necessary in some cases to have an early indication that finance will be forthcoming for the second stage, particularly if the business is totally dependent upon franchising for its progress.

Initial costs of a franchise

At this point it is worth looking at the costs which may be incurred by a franchisor in the initial stages, excluding the costs of the pilot unit/s and any additional staff required. Initial costs can generally be regarded as those costs incurred up to the point where the first franchisee is recruited.

The following illustration gives some indication of the order and nature of expenses which will be involved.

Professional fees, accountant, consultant, solicitor, agreements/ trade marks, BFA membership, etc. – £20,000

Training and operations manuals, research, compiling, printing – £15,000

Corporate identity, logos and prospectus (design/printing) – £10,000

Advertising for initial franchisees, interviewing costs, training (continuing at approximately £2,000 per franchisee per year) – £5,000

Total – £50,000

Of course, these costs vary widely depending on some key factors which include:

1. the type of business,
2. the degree of conversion required from the existing concept,
3. the availability of the time, resources and skills within the company which is franchising, and
4. the proposed approach to franchising.
5. franchisee investment level.

It is essential, however, that time and resources allocated by the franchisor to the franchise development should be included in these costings.

The latest NatWest/BFA franchise survey found that the average investment by a new franchisor in establishing its franchise was £170,000. However, there was a range in those questioned from £25,000 to over £250,000.

Franchisor’s financial plan

Just as it is difficult to generalise on the scale of the financial costs of a franchisor, it is equally difficult to give an accurate model of a ‘typical’ franchisor’s financial development plan.

The principal features will be:

• A large initial investment will be required which could result in a funding requirement in the region of £100,000. This could be even higher in larger-type franchises with the need for large-scale adaptation.
• A cumulative break-even position may not be achieved until Year 4 of trading.
• After break-even, the franchisor should be richly rewarded from the scale of its operations, and its return on capital is high.

Sources of finance

When it comes to finance for the development of a franchise, there are two principal avenues to consider.

Firstly, there is bank finance. Because the bank is being asked to finance a business idea as opposed to the actual acquisition of assets, it will need to look critically at the level of security cover and the viability of the projections which form the basis of the plan.

A company with a profitable mainstream business which is generating profits from a core business is at an advantage here and loan facilities over a period should be available, together with a measure of working capital as is necessary.

Secondly, there may be a case for looking for some element of equity finance if the proprietors are not able to raise the finance needed, or to provide a sufficient proportion of the risk capital themselves. It should be noted that such a source of finance may involve the provider taking a proportion of the equity, or an option to subscribe to the equity.

When seeking finance, the franchisor should support its financial development plan with very detailed budgets and cash flow forecasts. A bank would normally expect to see, as well as profit and loss projections, a three-year cash flow projection with the first year at least on a monthly detailed basis and Years 2 and 3 on, say, a quarterly basis.

The franchisor makes its profits from the eventual scale of its operation and it may be some time before it has sufficient franchisees of the right quality to produce these profits. Premises may be involved and finding suitable sites may be a problem. Invariably, in such cases the take-up rate by franchisees is not achieved within the expected time scale.

Often a subsidiary or separate company is formed to run the franchise and very often the company-owned outlets will be asked to pay an artificial service fee so that correct comparisons can be drawn between the trade and performance of company-owned and franchised outlets.

Summary

In summary, a franchisor should firstly be certain that it has a business which is capable of being franchised successfully. In view of the costs and time involved in establishing a franchising concept, it should take time to establish it on a proper basis and carefully prepare a business plan, ensuring that it is within the financial and managerial capabilities of the business. The pay-back will not be immediate, but when it comes the business can be extremely profitable.

If the prospective franchisor is then able to demonstrate its professionalism and the overall viability of the concept, it is likely to find the banks, particularly those with a long-term commitment to franchising, agreeably responsive to a request for financial support.

It is too simplistic to believe that those who say they want to run their own business have the confidence and ability to do so, or that you should recruit those who you find pleasant to talk to, or have (or can raise) the money to buy the franchise and set up their business.

The franchisee/franchisor relationship is long term with ramifications for both parties if things go wrong to say nothing of the effect such situations will have on your existing business.

Franchisee profile

Bearing this in mind how do we develop a franchisee profile? It is in two parts, the first being knowledge and experience. Whilst it is true that people take a franchise in the expectation that the franchisor will provide training, there are some basic skills that need to be present.

If yours is a management-type franchise then obviously some management experience is desirable which could involve staff motivation, operational experience, organisational abilities, customer relations and so on. If it is a van operation providing a service it may be that the prospective franchisee should have manual dexterity and be accustomed to working outside in all weather, etc. As far as salesmanship is concerned franchisees with sales orientation can be taught new selling techniques, but it is often difficult to teach people with no sales experience to be successful whilst also running their business. Above all, the candidate must have the financial capability to make the investment as without it both parties are wasting their time.

Having determined the skills required, construct a skills grid with the skills listed down the left-hand side and columns marked 1-5 along the top so you can weight each skill. This grid should be used when looking at application forms to select candidates for interview and also as an aide memoir when asking questions during the interview.

Just because someone has the necessary skills it doesn’t mean that they will make a success of a franchise.

Personal traits

The second part of the profile is more difficult to ascertain and this relates to personal characteristics. These are nothing to do with intelligence, education or knowledge, but are part of a person’s make-up.

It is not simply a subjective view of a person’s make-up and it needs to be determined by someone trained to do so. It is best done by a psychometric test designed to show up basic personality traits.

In the context of franchising, as opposed to testing for psychological investigation, the objective is primarily to give guidance as to whether the applicant would be a suitable type of person to operate under a franchise arrangement. It follows, therefore, that a test devised specifically for this purpose is preferable to a purely subjective judgment. Some examples are coping under pressure, sales orientation, working within a framework, and whether the person is a loner or team player.

The procedure is simple and straight forward. The candidate is asked to complete a questionnaire of “mostly-true, or mostly-false” questions. This takes no more than 20 minutes. The answers are then sent off for assessment. The whole procedure is under the control of the franchisor and no one outside knows the identity of the candidate.

The same people you have identified as successful in your own experience should be tested as this will then give you the overall identikit picture, and between your own assessment and the psychometric test, you will be in a very much better position to match the right people to your franchise opportunity.

You have now completed one of the most important steps in your recruitment strategy and can begin to prepare to recruit, safe in the knowledge that you know who you are targeting.

Selecting the media

Now you know the profile of who you are looking for the next question is where and how you should advertise your franchise. The sector has its own magazines, and the national press regularly run franchise sections with special franchise features.

There is also the regional press in larger towns and there may be trade/hobby magazines serving the market your franchise falls into and they may be read by the type of people you are hoping to attract.

It is best to contact the papers and franchise magazines to request a media pack which will provide data on the publication and its readership, such as social class, cost, coverage and circulation figures – all important factors that should influence your decision to advertise with them.

The latest media that many franchisors have found to be successful is the internet. If you have your own site you should include details of your franchise opportunity on the site together with an on-line application. In addition, there are some good sites that specialise in franchises on offer and for a monthly fee will advertise your franchise, along with others.

The three leading British Franchise Association (BFA) supported franchise exhibitions are in London, Birmingham and Manchester and are organised by the Venture Marketing Group. You will need to be accredited by the BFA to exhibit. As the cost of the stand space, the display, and the staff to man your stand could well take a hefty chunk from your media budget you will need to plan every detail carefully.

Many thousands of potential franchisees attend these exhibitions and you will be on show with many other franchise systems so the appearance of your stand and the presentation of your franchise opportunity have to be spot on.

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The recruitment of franchisees is now a highly competitive business and thanks to the efforts of the BFA, the banks, and franchise sites, such as this one, potential franchisees are better informed than ever before.

Your advertisement must attract attention and avoid hype. When someone sees it they will within five seconds decide whether to read on, or move to a competitor. It is obviously important to grab their attention immediately so a well written advertisement should promote the unique selling points of your franchise clearly and simply. Avoid long sentences and very small print.

A potential franchisee wants to know in a nutshell what the business is, what support is available, the cost, and the likely income. Within those broad essentials are your major selling points, i.e. a long-established business, new product or service etc, and if appropriate BFA membership.

Media budget

You are now armed with the type of person you are looking for. You know the most suitable type of media and you have a well written advertisement.

Franchisee recruitment is a long-term process and short term success is a rarity – it takes time and money. Recruitment is a numbers game, as on average for every 100 responses 10 will be suitable for interview from which, according to the national average, you will recruit one or two franchisees. It, therefore, follows that providing your recruitment efforts are well targeted, the more you spend, the more enquiries and the higher the rate of recruitment you will achieve.

Keeping these numbers in mind the media budget should be planned for 12 months with reviews every month to see which media is producing the enquiries, the quality of those applicants, and the conversion rate.

We should at this point include PR, which as a rule generates more enquiries than straight advertising, but it is difficult to get material published unless it is written by a professional and it often has to be linked to advertisements.

Selection process

The selection process begins the minute an applicant call or writes for information and continues until the commencement of training. A structured selection process will build the applicants confidence in the franchise as it is a reflection of how the franchisor runs the business. Each stage of the process is important as you don’t want to waste time interviewing unsuitable candidates, or people who are just browsing. At some stage during the process a deposit should be sought to confirm the applicant’s commitment. There should be standard letters for situations such as sending out response packs, confidentiality agreements, and forwarding the franchise agreement to the applicant’s solicitor.

Interview

More than one interview is necessary and the applicant’s partner/spouse should always be invited as having the support of the family is essential, especially in the early days whilst the business is being established.

At the first interview, a common mistake is to talk about the franchise for 90 per cent of the time and ask questions of the applicant for 10 per cent when it should be the other way round. The first interview should last no longer than two hours. It often helps if you have a slide presentation on a laptop to show the key points of the franchise. At the end of it, judging from the response to your presentation, your questions, and the quality of the questions you are asked, you should have a fair idea of whether the application should be pursued further.

If both parties decide to proceed, it is at the second interview that the psychometric test should be given and, if satisfactory, hopefully both parties should then be ready to agree to enter into the franchise contract.

If you have been as careful as we have suggested, planned your recruitment strategy properly, dotted the ‘i’s and crossed the ‘t’s you should generally end up with a good franchisee, having avoided selling a dream and getting a nightmare in return.

It should be remembered that the franchisor’s income does not go straight into its coffers as profit. The initial franchise fee it charges to the franchisee will be the mechanism by which it recovers its own franchise development costs and the specific costs relating to setting-up each franchisee in business (of which, more later). Of the on-going franchise fees, only a small proportion may be profit with the rest going to pay for the support and back-up that the franchisor is contractually obliged to provide to its franchisees.

Firstly, we will examine the situation from the perspective of the franchisor. The setting-up of a franchised network, perhaps involving the conversion of a company-owned chain, can be a complex, time-consuming and costly business for the franchisor at least in the short term.

At the outset, a prospective franchisor will have to cover the costs associated with putting all the necessary elements of the franchise in place. This might include advice from franchise consultants, franchise-proficient lawyers, accountants, trademark agents, and territory mapping specialists, etc. The components will include the drafting of the franchise agreement, the operating manual, brochures, prospectus and other promotional materials. Other costs may include the recruitment of specialist staff to oversee the franchise network and perhaps additional premises from which they can operate.

Having created the franchise structure, the franchisor will then incur further costs in promoting its offering and advertising for franchisees. This may involve a mix of media, including franchise exhibitions, websites, and advertising in newspapers and magazines. Having generated the enquiries, the franchisor will then have the costly task (both in terms of time and resources) of sifting through the responses. This will usually be through a highly objective recruitment process involving the assessment of the original application, several interviews and, in some cases, credit checks and personality profiling.

It is only at the end of this process that the franchisor will offer franchises to the candidates who possess the right qualities and the right amount of capital. The recruitment stage can be the most expensive of the whole process whilst the fledgling franchisor tries to discover the most effective mix of media and the right budget required to generate the number of candidates it needs to grow its network at the desired rate.

Having selected its candidates, the franchisor will then need to devote a considerable amount of time and effort to ensure that they are adequately trained and prepared to successfully launch and operate their businesses. The franchisor will have to ensure that it has the resources within its organisation to handle the throughput and that its staff are skilled in both the day-to-day operations of the proposed franchise business and their ability to train the candidates.

In reality, it will probably be some time before the franchisor’s income, both in terms of initial franchise fees and on-going fees, reaches a level that provides it with a profit. Hence setting-up a franchised network must always be seen as a medium to long-term strategy. Similarly, whilst the benefits of franchising from a prospective franchisor’s standpoint are said to include the ability to expand its business using other people’s capital (i.e. the franchisees) it is clear that a franchised network cannot be established without (at least initially) some reasonably significant levels of capital investment.

Initial fee

The selection and recruitment of a new franchisee will hopefully be just the beginning of a long-term commercial relationship. As such, the franchisor should not view the initial fee as a mechanism for making large profits. The franchisor should, instead, aim to make the bulk of its income over a longer period from the income and profits generated by its franchisees. The initial fee should, therefore, be viewed as a joining, or entrance fee, that at the same time enables the franchisor to recover a proportion of its development costs, and the specific costs, in terms of the training and recruitment, of setting-up each specific franchisee in business.

The initial fee is usually paid as a lump sum at the time the franchise agreement is signed and before the franchisee has received training, a copy of the operations manual, or commenced trading. Whilst the size of the fee is intended to recover the franchisor’s costs, it makes sense to keep the fee at as low a level as possible as the number of prospective franchisees, who can afford a fee of, say, £30,000 will always be smaller than those who can afford £10,000. A franchisor must take care that it does not price itself out of the recruitment market.

Knowing at what level to set the initial fee will be a problem for a franchisor in its early days. There is no standard pattern, although there may be an observed similarity between the fees charged by different franchisors in the same line of business. Whilst this is perhaps only to be expected, given that these companies probably had similar development costs, this may also be evidence of benchmarking with franchisors not wishing to place themselves at a commercial disadvantage by charging a higher fee than their competitors.

A further consideration for keeping the initial fee at a low level, often over-looked by overseas franchisors looking to enter the UK marketplace, is that having paid a large up-front fee a franchisee may be left with insufficient capital to invest in the business to make it successful. In such circumstances, the franchisor does run the risk of handicapping the franchisee’s business from day one, whereas if it had charged a lower fee it would be more likely to have the franchisee in the position to generate greater levels of profit and over the longer term to pay more in on-going fees.

In the past commentators have suggested that the initial fee element should be set in the region of 10 per cent of the total start-up costs of the franchisee’s business. Such a relationship is less relevant in the modern market, given the boom in the number of relatively low-cost service industry franchises in which the franchise fee may be the largest single cost element.

Initial franchise fees generally remain modest in the UK and it is standard practice to have fees that don’t vary according to the territory or location. It is quite a common temptation for a new franchisor to want to charge a higher fee for a territory with a perceived greater-than-average opportunity. Such a temptation should, however, be avoided in favour of a level playing field. There will be time enough for the franchisor to earn from its stronger territories through its on-going franchise fees or product markups.

One situation where the initial fee may be reduced or waived is where, in the absence of a fully-piloted franchise concept, the franchisor offers a special deal to the first of its test or development franchisees. Such franchisees are accepting a higher level of risk and may find the franchise system changing as any wrinkles are ironed out. This arrangement should not over-ride the principle that the franchise agreement should be the same for all. In such cases, any discounts or variation of terms should be covered by a side letter.

When a franchise network has reached maturity, and its initial development costs have been met from the up-front fees paid by the early franchisees, then the franchisor may start to make significant profits from franchise sales. Indeed, after a franchisor’s brand has developed and gained market strength there may be a case for increasing the franchise fee to reflect such progress. Market forces may also come into play in situations where the demand for the franchise exceeds the number of territories that are available. This can lead to a progressive elevation in the franchise price. Nevertheless, the fee should never be elevated to a level that deters buyers. The franchisee must always feel that he or she is getting good value for money.

On occasions, a franchisor may have asked the prospective franchisee to pay a deposit, which may or may not be refundable in full or in part. Such a deposit may be sought if the franchisor will be spending time and resources on the prospective franchisee’s behalf in perhaps helping it to investigate the viability of an area or territory, or find suitable premises.

A positive factor for a franchisor is that whilst its early overheads may be high its income should from that point grow faster than its expenses. The staff initially required to service five franchisees may also be sufficient to service, say, 15. Each new franchisee coming on board represents additional income and as the turnover of each rises the franchisor’s income will grow proportionally.

A franchisee can generally be regarded as a long-term contracted source of income to the franchisor. A franchisee having perhaps invested heavily in its new venture (and therefore having his or her neck firmly on the block) will normally be more highly motivated than an equivalent company employee. As a result, they can generally be counted on to direct their efforts towards continually boosting their turnover and thereby the income of the franchisor.

Another issue to consider is the supply of initial equipment and any other items that are necessary for the running of the franchisee’s business. Often the franchisor will supply such items or arrange their supply. In this situation it is considered unethical for the franchisor to regard the supply function as a source of hidden profit. The franchisor will nearly always be found out, and the whole relationship and trust between the franchisee and franchisor will be jeopardised.

Often a franchisor may achieve discounts or economies of scale through its bulk purchasing arrangements and, unless the franchise is based on mark-ups, these discounts should be passed on to the franchisees. It is generally considered acceptable for the franchisor to retain a modest margin or handling fee for buying in supplies, but the underlying ethos must always be to give the franchisees the best possible value for money.

Similarly retained commissions, retrocessions, or other kick-backs from suppliers should be avoided and certainly not hidden. It is better to declare these amounts and demonstrate how they are used for the promotion of the business.

In situations where the franchisor provides the franchisee with a turnkey business and equips the outlets ready to trade similar principles should apply. The franchisor should make no hidden profits and be prepared to provide full details of the costs it has incurred including, where appropriate, invoices from suppliers.

Initial and on-going support

As stated earlier, the initial franchise fee should be regarded as covering the cost of the franchisee’s recruitment, selection and training. The on-going fees, whether received as a percentage of turnover or a mark-up on goods supplied by the franchisor, should be partially utilised to fund the cost of providing the essential back-up and support to the franchisee’s business.

Initial practical guidance and support might include advice on finding, acquiring, designing and fitting out suitable premises. The franchisor might also provide guidance on the equipment required and where to obtain it. There might also be advice on training, business development, generating sales leads, marketing and advertising.

Training is of particular importance as the whole ethos of franchising is that a newcomer to the business will be operationally trained to run its business in accordance with the franchisor’s proven operating system and methods. The content and duration of the training programme varies from franchisor to franchisor, although it may involve on-the-job training in an existing outlet, or in the field. It could include classroom modules, sales training, learning how to use equipment or processes, and familiarity with or preparing the products. The training must enable the franchisee, in a relatively short period of time, to become expert in all areas of the business prior to opening.

The franchisee may also have to learn how to operate a small business, perhaps for the first time in their life. They may, therefore, need to be instructed as to how to keep accounting records, how to manage cash and stock, and aspects of recruiting, managing, training and coaching staff, as well as the various legal and fiscal requirements and obligations associated with running a business.

The franchisor may be expected and, indeed, contractually obligated, to provide certain continuing support services which, depending on the type of business, may include:-

• Regular visits by the franchisor’s field support staff to assist in correcting, or preventing, problems and help the franchisee to develop their business.
• Liaison with the franchisor and other franchisees to exchange ideas and experiences.
• Continuing product research and development, including investigation of the marketability and compatibility of new products/services with the existing business.
• Training and re-training facilities for the franchisee and perhaps their staff.
• Market research.
• National and local advertising and promotions.
• Bulk purchasing opportunities.
• Management and accounting advice.
• The organisation of national conferences and regional meetings, and the publication of newsletters and other literature.

A franchise should be viewed as a long-term relationship in which the initial concept is being continually refined and developed over time with input coming from both the franchisor and the franchisees.

On-going fees

In return for its on-going support and as its primary source of profit, the franchisor will charge the franchisee an on-going fee. The most common method of doing this is to charge a management services fee which will be expressed as a percentage of the franchisee’s turnover. Alternatively, where the franchisor provides the products or materials that the franchisee sells or uses, it may take its return through mark-ups. Naturally, there are pros and cons with both methods.

Where the products can only be sourced through the franchisor and are competitively priced as a result of the franchisor achieving economies of scale then the franchisee may be quite happy with mark-ups. However, if the franchisee feels that the franchisor is making an excessive margin on the goods, or it discovers that the same or similar goods can be obtained more cheaply elsewhere, problems could easily arise.

Where a franchise involves a requirement or obligation to buy products from the franchisor – known as a product-tie – there could be competition law ramifications. Such product ties can, in certain circumstances, be deemed anti-competitive and so franchisors operating such arrangements will have normally made provision for them in their franchise agreements. The competition authorities will generally uphold product ties within a franchise environment, provided that the franchise agreement has a term, or break-clause, of no longer than five years.

However, the majority of franchisors derive their income through a management services fee, calculated as a percentage of turnover. To establish the rate of these fees, which again should be constant across the network, the franchisor needs to assess the financial performance of its pilot outlets in relation to the anticipated turnover, gross profit and costs of the franchised units. This gives rise to another careful balancing act. If the rate is set too high, the franchisees may well resent what they consider are excessive fees. Such a situation has led to disquiet in many franchise networks. On the other hand, if the franchisor sets the rate too low it could end up making insufficient profits and could lack the funds needed to adequately support its franchisees. It is of key importance that the fees are set at such a level as to allow the franchisor to afford to deliver the level of support which the franchisees need, and indeed deserve, without negatively impacting upon the franchisees’ operational profitability.

Based on the performance data available, or the performance expectations, for both company-owned and franchised outlets, the on-going fee should be set at a level that is long-term viable for both parties so that each may achieve a reasonable profit and return on capital. In setting the fee, it is also important to consider the percentage charged by other franchisors in the same sector. Unfortunately, would-be franchisees often simply look at the headline percentage figure and look no further to find out what this translates into in actual profit or the level of support services.

The range of management services fees that are charged varies enormously between different types of businesses, depending on their relative turnovers, profitability and margins. Convenience stores, for example, may have on-going fees of only a few percent because they operate with low margins, but high turnovers. Service businesses on the other hand, with wider margins, may be at the other end of the scale with fees as high as 25 per cent or more as they have very low direct costs.

The fee should, of course, also reflect the level and range of services provided by the franchisor. It should also be borne in mind that the higher the level of fee, the higher is the likelihood that franchisees will resent paying it, and the more they will expect in return.

The franchisor should recognise that it is likely to generate less income from a franchised outlet than it would from a company-owned one. This is a given since it is the franchisee’s capital that has established the unit and it is the franchisee who is exposed to all the day-to-day problems that occur.

When collecting the management services fee many franchisors ask their franchisees to complete a return showing daily sales and fee calculations. Some returns may also seek information as to sales by product or service type, and details regarding local marketing and sales activity. This not only provides the franchisor with information relating to the payment, but other data which can help the franchisor track what is going on in the network. At the individual franchisee level such data can be useful in identifying performance issues at an early stage.

Franchisors will also need to examine at some stage whether their franchisees are declaring all their income, particularly in franchises where some customers pay in cash. From a franchisor’s viewpoint, under-declaration of sales is the worst crime that a franchisee can commit. It will, of course, be a breach of the franchise agreement and technically grounds for termination. Most franchisors would forgive any accidental or inadvertent underdeclaration, whilst a tough line will be taken against any franchisees where substantial or repeated underdeclaration takes place. The onus is clearly on the franchisor not to rely totally on trust, but to build into the franchise some monitoring systems that make it harder, if not impossible, to hide turnover. Such fail-safe techniques include regular audits, mystery shoppers, spot-checks and modem-linked tills which feed details of all transactions electronically to the franchisor. Companies that fail to take such precautions are likely to be sowing the seeds for later difficulties.

Another means of taking on-going fees is by levying a fixed or a fixed minimum charge. Such a method is not recommended by franchising purists as it can be indicative of a franchisor who is happy with a minimum level of income, regardless of the success or otherwise of the franchisees. A system in which the franchisor is only successful if its franchisees are successful is clearly a more mutually beneficial approach.

Having different percentage management service fees for different franchisees within the same network is highly inadvisable. Differing fee levels encourage negotiation, lead to uncertainty, and breed discontent among franchisees. There are, however, examples of franchisors introducing tiered structures whereby franchisees are rewarded by having their fee percentages reduced for achieving targets or hitting turnover thresholds. The reduction tends to apply on the amount of turnover they achieve over the threshold, rather than on their entire turnover. Such structures can act as a good incentive to perform and are generally a positive tool when used sensibly. To work effectively, the thresholds need to be reviewed upwards from time to time as otherwise franchisees may achieve them simply due to inflationary trends without having achieved any actual increase in sales.

In conclusion, the on-going fee must be low enough so that the franchisee can pay it and still make a reasonable profit commensurate with the capital employed. The franchisee should also ideally continue to feel it is getting good value for money. On the other hand, the franchisor needs to cover the cost of the support services it provides and make a reasonable profit itself – a true balancing act.

Advertising levy

In addition to the on-going management services fee, or product mark-up, many franchisors take an additional, but generally smaller, percentage of turnover known as the advertising or marketing levy.

One of the principal advantages of becoming a franchisee is that you are part of a larger network, perhaps enjoying the benefits of strong brand recognition and national advertising. To assist the franchisor with the funding of this continuing brand development, franchisees are required to make a contribution in the form of a levy. By making it linked to each franchisee’s turnover, the more highly performing franchisees, which it could be argued have benefited most, make a larger contribution than the weaker performers.

It is important to get a degree of franchisee involvement in the control and expenditure of the money generated by the levy. Over time, the total of the contributions could be substantial and the franchisor should ensure that the fund is not only independently audited, but that there is a committee made up of franchisee representatives and the franchisor to budget and administer the fund. As the fund will ultimately benefit both the franchisor and the franchisees it makes sense for the former to also make a financial contribution. This should be on the same basis as that of the franchisees in recognition of the benefit being derived by the company-owned outlets. The franchisor might also top-up the fund with additional contributions, particularly in the early days.

Summary

Within the franchisee/franchisor relationship there are several financial transactions:-

• The initial franchise fee
• The on-going fees either calculated as a percentage of turnover, or taken (invisibly from the franchisee’s viewpoint) as a product mark-up.
• The advertising or marketing levy.

In return for the fees, the franchisee will expect their franchisor to train them, set them up in business and provide an on-going support service, as well as continue to develop the concept as a whole.

It is essential that the fee levels are seen to be fair by all, and provide an adequate financial return for both the franchisor and its franchisees from the outset and over the long term.

Why do I need a manual?

It will enable you to copyright your ideas, know-how and trade secrets and, assuming you have an ethical franchise, it will be one of your contractual obligations to provide each franchisee with a copy on loan for the duration of their contract.

The manual will also reinforce the terms of the agreement, establish – and enable you to maintain – quality standards, impose conformity and uniformity across your network, provide a means for monitoring and control, set benchmarks for continuous improvement, and provide you with the means by which you can update and introduce new systems.

How will the manual benefit my franchise?

If you are to have a strong brand, the business must be consistent in every way. You and your franchisees must live up to the brand values of the system and deliver your customers’ expectations. Superior quality in terms of knowledge, selling skills and all-round professionalism is vital in promoting brand values and products/services.

A well-written and produced manual will help you to achieve:- greater efficiency; new levels of customer satisfaction; greater customer loyalty; stronger links between you, your franchisees, and your customers; improved understanding of the business partnership between you and the franchisees, and of franchising as a system; better targeted help and advice from your franchise support office; and a reduction in the number of unnecessary enquiries.

When must I have the manual ready?

Your franchise agreement should require you to have the manual ready for your first franchisees. Ideally, it should be issued to franchisees when their induction training commences. Therefore, it makes sense to prepare your manual in such a way that it dovetails with the subjects covered in the induction programme and later in your development training programme.

How can I keep track of the number of manuals and amendments issued to franchisees?

You should issue a numbered copy of the manual on loan for use by the franchisee and his staff, but it remains your property for the duration of the agreement. When it terminates, the franchisee must return the manual to you, together with any other related documentation. By numbering each copy you will be able to keep track of all the copies. The numbering is particularly useful when it comes to issuing new editions of the manual and checking in returned obsolete copies.

Great care must be taken to ensure that no part of the manual falls into the hands of any unauthorised person because it contains information about your working methods and practices that you would not want generally disclosing. Franchisees and their employees should be asked to sign a confidentiality agreement before they are issued with a manual and this should be kept with it as a permanent record. Franchisees must not be allowed to make copies unless they have been given written permission.

Can I charge franchisees for copies of the manual?

It is part of your initial franchise package and the cost of producing it must be covered in your business plan. However, you can make a charge (probably anywhere between £200 and £1,000) to replace it, providing your franchisees have been made aware of the replacement cost.

Who owns the copyright of the manual?

You, as franchisor, own the copyright. The manual should be prefaced with a copyright notice and we recommend you incorporate the copyright symbol into every page. This can be printed on – or even watermarked into – each page.

Normally, we add a disclaimer to explain that, although the manual contains references to legislation and regulations affecting the franchisee’s business, they are only summaries of the position and should not be relied upon as full statements of rights and obligations.

My franchise is a relatively simple concept. Surely there can’t be many procedures to document?

Franchisors with simple concepts are often surprised when we begin to draw up the contents of their manual. For example, a manual for a home delivery franchise can run into several hundred A4 pages, supported by additional worked examples, and business forms for monitoring and controlling the business.

During the pilot stage of the franchise, it is our standard practice at Manual Writers to produce a pilot manual which can then be fine tuned to progress to the first full edition for publication just prior to the official launch. The final stage, perhaps 18 months after launch, would be to update the manual in line with your on-going obligations, such as development training.

An amendments sheet at the front of the manual is the usual method by which updates are recorded by the franchisee. You should make regular checks that your franchisees have been diligent in adding these amendments to their manuals and thus ensure the integrity. After all, it is vital that everyone sings from the same hymn sheet.

How can I maximise the value of the manual?

It should fulfil the following four main functions. It should be a comprehensive reference source, a training tool (for the franchisor at the induction training stage, or when training at arm’s length, and for the franchisee when training his own staff), a marketing tool, and a business development tool.

Therefore, the manual must underpin the franchise agreement, define your core values, describe precisely your definition of quality, identify your franchisees’ responsibilities, ensure franchisees and staff understand their role in attaining quality, document the main operating requirements and the main management requirements, dovetail with existing documentation (via cross-references), provide accurate franchise support office reference points for help and advice, set new standards in customer service, and benchmarks for further improvement.

How should I structure the manual?

Manuals should, of course, be tailored to the individual franchise, but the contents usually fall under three main headings – set up and support, day-to-day operating and management requirements, and business development. We will look at these in turn.

Set-up and support – Firstly, it will provide incoming franchisees with all the information they require at the planning stage prior to signing the franchise agreement – what precisely can be expected in terms of their input (financial and otherwise), a description of the pre-launch support and timing, and details of the obligations, risks and rewards.

Secondly, the franchise support staff by documenting the procedures for attracting, interviewing, recruiting, setting-up and supporting franchisees for the first 12 months will understand more precisely what support they must provide and the quality standards they must establish and maintain.

Here it is worth noting that where a prospective franchisee has not already signed the franchise agreement, he should have signed an undertaking of confidentiality prior to having sight of the manual.

Day-to-day requirements – These operating and management requirements form the core content of the manual and this section should deal in depth with every aspect of the day-to-day running of the business – product knowledge, the safe operation of the equipment and its maintenance, the pricing of the products/services, customer service, marketing and promotion, selling skills, staffing and the financial management and reporting requirements.

Business development – As part of your on-going obligations, you should equip your franchisees with the advanced skills that are necessary to grow the business by providing them with development training and on-going support.

This section of the manual should focus on the methods that can be employed to improve competitiveness, increase profitability, gain new markets, and set new benchmarks for improvement.

An important component here is a business and financial review procedure to monitor the financial health of the franchised unit and take remedial action where necessary. This will use traditional methods to evaluate the unit’s business performance – revenue, production costs, effective use of resources, return on investment, and cash-flow. Well-established franchise systems may also employ less traditional methods, such as customer focus research and attitude surveys, to determine how customers perceive the franchised unit, and whether or not the actions being taken are improving those perceptions.

What title should I give the manual?

The term ‘franchise manual’ is generic and covers all the written information that will be used to set-up, operate and develop a franchise. The title you use should mirror that in your franchise agreement – usually ‘operations manual’, ‘operating manual’, or ‘operational manual’ (the latter being a more accurate indication of its contents). However, some franchisors prefer to chose a title that reflects the importance of quality standards as evidenced by Unigate’s Franchisee Quality Manual.

What is the difference between operating and operational?

We often hear people asking for what they want in terms such as ‘good’, ‘the right size’, or ‘on time’. Obviously these words mean something to the person using them. They also mean something to the person hearing them. But will the two meanings be the same? Only the use of operational definitions can guarantee a correct interpretation.

A definition explains what something means. An operational definition does much more. It explains how something should be observed, measured, or decided. Without definitions, ambiguity can easily arise. Training seeks to qualify operational definitions and demonstrate that only the highest quality service and product standards are acceptable.

Generally speaking, operating definitions are set out as checklists. These are highly effective in themselves as aide memoires. An example would be a store standards checklist.

However, operational definitions are required to describe sufficiently all the steps necessary to complete a given task to the required quality standards.

In a food service franchise, for example, the easy option would be to tell the franchisees that cleaning must be carried out frequently. But this, in fact, tells them nothing. The franchisor would need to explain what must be cleaned (kitchen floor, equipment, surfaces), what must be used to clean them (list of approved cleaning solutions), how these solutions should be used, what are the logical steps in carrying out the work, how often cleaning will take place, and at what times.

We recommend that this information should be reinforced as a daily cleaning checklist to be used by the owner/manager to ensure that such jobs are completed. It would also be helpful to explain why this is a requirement (e.g. to prevent cross-contamination).

How can we make the manual user-friendly?

Here are some proven suggestions that will help to make it user-friendly and thereby likely to be referred to more frequently and enthusiastically.

• Develop an easy-to-follow, logical structure.
• Compile a comprehensive table of contents.
• Apply a good and consistent method of indexation.
• Provide a simple system of consecutive cross-referencing.
• Set a common style to run parallel with the corporate image.
• Adopt an appropriate viewpoint for communicating procedures in an unambiguous way to reinforce the terms of the franchise agreement.
• Use an appropriate medium for the type of user (i.e. hard copy, electronic format).
• Create a simple, easy-to-read visual presentation for the pages, making use of white space and a plain sans serif typeface of at least 10 point.
• Produce, say, a separate volume of worked examples, business forms work, etc. for easy reference.
• Adopt a format that makes it easy for you and the franchisees to update the manual.

Can I write my own manual, or should I use a specialist?

Many franchisors have produced their manuals in-house with varying degrees of success, but others have sought external help having recognised that they needed professional guidance, and/or specific authoring, editing and publishing skills.

Some people find it impossible to fit project managing and writing a manual into their busy schedule, whilst others find that they have priorities that are always more pressing or, indeed, preferable. Information provided by their colleagues often turns out to be operating rather than operational, listing the tasks that need to be undertaken, but failing to describe how they should be carried out and with what frequency.

In-house writers can often fail to approach their subject objectively and, because of familiarity, cannot describe the procedures precisely. Another problem is that they do not know how to ensure that their manual underpins the terms and conditions of their franchise agreement. At the initial stage, they keep re-writing, but find it difficult to complete the job because their franchise business system is continuously evolving and improving during the first year of the pilot operation.

In contrast, an external resource, such as Manual Writers, can quickly become part of the franchisor’s team, absorbing everything about the business.

Manuals do not lend themselves to an off-the-shelf database solution. They all need to be tailor-made for each specific franchise operation because in today’s competitive world it is the individual franchisor’s distinctive management style, know-how and business system that make the difference and this can only be reflected throughout the network by all the units working from an exhaustive professionally-produced operating manual.

This is important when a franchisor grants exclusive territorial rights because in so doing it is in effect selling its rights to that particular market. In such circumstances, the franchisor will naturally be keen to ensure that the franchisee exploits its area to its fullest potential. This can been done by imposing minimum performance targets, motivating the franchisee, or a combination of both.

So far as minimum performance targets are concerned, these can in practice be no more than fiction. There is little point in having a minimum

performance target unless it is capable of being achieved, and at the same time meaningful in a purely commercial context. A franchisee with a low comfort threshold (and who is, therefore, easily satisfied with its performance) will merely do the minimum and sit back. If minimum performance targets are not readily attainable but difficult to achieve, franchisees may not always attain them. In those circumstances what is the franchisor to do?

A franchisor’s ultimate sanction will always be termination. However, there may be very good reasons why a particular franchisee has failed to achieve its performance target and the franchisor may therefore be reluctant to terminate for that reason.

The franchisor may, however, not take the same view with another franchisee, who has had similar

problems in attempting to achieve its performance targets but for different reasons. The second franchisee and the franchisor may disagree as to the reasons why it failed to achieve its targets. In those circumstances, if the franchisor terminates the second franchisee and not the first, it may be storing up problems in the future. It may be accused of being capricious, or of discriminating between franchisees for personal, rather than purely business reasons. Multiply this by the number of franchised outlets and the problem becomes apparent.

It follows therefore, that if performance targets are to be meaningful they have to be enforced. Inconsistency can breed contempt. This is particularly true of individual franchisees, but less so of development and regional/master franchisees, because such franchisees are by their nature mature business people and are expected to some extent to rely on their business acumen.

The second problem with minimum performance targets is, how is a franchisor going to decide what the performance target should be for the first year, or indeed how is it to know what a minimum performance target should be in year two, year five, year seven, or year ten? The problem in trying to determine, with any degree of accuracy, a minimum performance target is made infinitely more difficult if the franchise concept is novel.

Kwik-Strip is a good example. Kwik-Strip is in the business of furniture stripping and restoration. At the time that the franchise was established, no such service was available to the public. If a customer had a Victorian pine dresser with six layers of paint that needed stripping, the only way he could get the job done professionally was to take it to a restorer. Generally the service was only available to the trade and was quite expensive. With the arrival of Kwik-Strip it became possible for a customer to take the dresser direct to a local Kwik-Strip outlet to have it stripped at a reasonable price.

In such circumstances, where the size of the market has yet to be determined, how does a franchisor begin to fix minimum performance targets (usually called development schedules in development and regional/master franchise agreements) in any meaningful sense?

For individual unit franchisees, the target tends to be a minimum level of turnover of the franchisee over a given period. In the case of a development franchisee, it is usually a combination of the number of outlets to be opened and their turnover. For a regional/master franchisee, the target is usually the number of sub-franchisees it is able to attract.

What both franchisors and franchisees have found to be unacceptable is an annual or periodic negotiation of minimum performance targets for the forthcoming year(s). This introduces an element of contention in the relationship and for that reason has seldom been successful. Moreover in such circumstances, complicated mechanisms need to be introduced into the contract to determine what happens if the parties cannot agree. No development or master/regional franchisee will accept a unilateral imposition of targets on a periodic basis by its franchisor.

Some would also argue that a franchisee who achieves a certain level of turnover simply because a piece of paper requires it to do so, does not necessarily make a good franchisee.

Motivation

If one looks at motivation, the problem of the comfort threshold becomes more apparent, particularly in the case of individual unit franchisees. Most individuals have different thresholds.

People work for different reasons. Some work all the God given hours because they wish to make lots of money, others because they are workaholics or because they wish to build an empire. Some work for pleasure, whilst others see their work as a means to an end.

Many people are content to do an honest day’s work for a reasonable return and spend the rest of their time with their families, playing golf or pursuing whatever other interests they may have.

There is absolutely nothing wrong with that, and as the owners of their own businesses, it is their prerogative. However, franchisors may resent the exercise of this prerogative because it has a direct impact upon their profitability.

A franchisor will be faced with a dilemma if the person to whom it has granted exclusive territorial rights (and it is rare in the case of the grant of development or regional/master franchisees for this not to be the case) is more easily satisfied than the franchisor. Having granted exclusive territorial rights to a franchisee, the franchisor has effectively locked itself out of that particular market. If the franchisee then performs only according to the minimum performance criteria, or to the level of its comfort threshold, what is the franchisor to do?

In an ideal world a franchisee should achieve the maximum turnover of business that is possible in the territory to which it has been granted exclusivity.

In granting the exclusive territory, the franchisor would expect its franchisee in the fullness of time to achieve, say, 100 units of business, whether it is from the sale of the franchised products or services by an individual unit franchisee, or the sale of franchises by a regional/master franchisee, or in the case of a development franchisee, the opening of new outlets and/or sale of the franchised products or services.

However, what if the franchisee hits its comfort threshold at 60 units and thereafter refuses to bust a gut to secure the other 40 units of business? The franchisee is essentially happy with its lot. That may be fine for the franchisee, but what about the franchisor? The franchisor sees 40 units of business going begging. It is missing its percentage of the turnover of the 40 units which would flow to it through the payment of continuing franchise fees.

In the case of a development or regional/master franchisee, the consequences for the franchisor are more serious because the franchisee will have created a demand which competitors may now step in to satisfy.

But it may be worse than that. Both the franchisor and franchisee will suffer in the long term because if there are 40 units of business going begging, then sure as eggs are eggs, a competitor, seeing the potential, will step in and in so doing will not only soak up the 40 units, but may well succeed in taking another 10 or 15 units from the franchisee as well, thereby leaving both franchisor and franchisee worse off.

It should not be forgotten that for the most part, franchisors are in business to make money for their shareholders, and as much of it as they possibly can whereas individual unit franchisees, as we have seen, go into franchising for a variety of reasons. Not all go in only to make as much money as they possibly can.

What seems on the face of it to be a straightforward argument in favour (from the franchisee’s point of view) of the granting of exclusive territories has turned out not to be necessarily so. The pattern of franchising in the UK now suggests that franchisees are more vociferous in their demands for exclusive territories and franchisors are more acquiescent.

Market forces

I can think of no transaction where the refusal by the franchisor to grant exclusivity to an individual unit franchisee has been a deal breaker, or where the business failure of either franchisor or franchisee has been attributed to the fact that either exclusive territorial rights were granted, or that they were not. In the UK at least, the invisible hand of market forces appears for the most part to have regulated franchising without the need to create artificial monopolies.

However, the same cannot be said of development and regional/master franchisees where it is common practice for franchisors to grant, and such franchisees to demand, exclusivity. Without the protection offered by exclusivity such franchisees will not commit the resources needed to develop the franchise within their territory. By the same token, such franchisees also accept that hand-in-hand with the grant of exclusivity go minimum performance targets. However, unlike individual unit franchisees, there is room for negotiating minimum performance targets in the case of development and regional/master franchisees.

Furthermore in my experience franchisors take greater care in selecting development and regional/ master franchisees. Where the relationship between the franchisor and this type of franchisee is a good one, franchisors are more amenable to revising minimum performance targets in favour of a franchisee who has under-achieved for a good reason, for example because retail premises in its territory have become difficult to acquire.

For franchisors, who have not yet gained the requisite experience, or lack the expertise to meet specific challenges, the word “resales” can set knees trembling (currently there is an upsurge of advice and professional assistance coming on to the market to help franchisors with their resales activities). There is, however, another phrase that often has the same effect – and that is “franchisee association”.

Such associations go under many names: franchise council, franchisee association, franchise committee, advisory group, consultative forum, advisory board, and probably several others as well.

There are as many descriptors as there are formats for these associations. Each describes a formal or informal grouping of franchisees that has an independent existence as a committee or council, and meets with the franchisor to discuss the business. There the similarities end. We shall now set about de-mystifying this phenomenon.

How do these associations come about?

Too often, a franchisee association is born out of conflict – whether that conflict is anticipated, planned, imagined or real. If the initiative to form the association comes from the franchisees, the likelihood is that they perceive a problem or a threat, and feel a need to respond to it with collective strength.

Seldom do franchisees gather together and say: “You know, I’ll bet if we had a franchisee association, it could be a force for good in our happy franchise, and improve this business for the benefit of both us and our franchisor. I’d like to give up some of my time for a cause like that to help our franchisor”.

Sadly the reality, if it is born from discontent, is more likely to be a case of: “Are you happy with everything about the franchisor, George? No, neither am I. If we all band together and gang up on our franchisor, we might be able to throw around sufficient weight and threaten to start changing a few things to make things more to our liking.”

If the franchisees get around to starting an association before the franchisor, the likelihood is that it is being motivated, to a greater or lesser extent, by negative perceptions. If for no other reason, that is why the franchisor who takes the initiative and facilitates the setting up of an association is in the driver’s seat. As well as heading off trouble before it arrives, such action will be seen as a progressive step and a very open gesture – both of which are, in fact, usually true.

You may well ask: why do we need a franchisee association at all? What is it for – what does it do? Should it be encouraged or discouraged? What would be its relationship with the franchisor? What are the expectations? Who should set it up – the franchisor, or the franchisees?

What is the reason behind it? Should it have rules? Should it have power? Who runs it? Who is on it? Are its members democratically elected, appointees, or a combination? And should the franchisor be worried by it?

Let’s start with the last question – should you be worried by it? The politician’s answer applies here: “yes and no.” Yes, if you adopt the ostrich position and stick your head in the sand; no, if you realise that it is a fact of business life and deserves to be treated as such, with confidence, professionalism and respect.

Franchisee associations are not an inevitable fact of life, like death and taxes, but nevertheless most franchise networks of any size have one.

What does a mature, integrated association look like?

Franchisee associations range from sophisticated structures, where the association might have its own written constitution, or even be a limited company in its own right, right down to a handful of people appointed by the franchisor to serve on a committee. Not surprisingly, the norm is somewhere in between.

Typically, the people who comprise the association’s committee or board will be elected – totally, or at least in the main – by franchisees. This gives the elected members a degree of acceptability and credibility with their peers that they would not gain were they to be mere appointees of the franchisor.

That is not to say that the franchisor should not have some say in who serves on the association’s committee. Input by the franchisor is highly desirable as the company does not want to find itself suddenly faced with a committee made up solely of under-achieving, moaning malcontents, who have no desire to work constructively for the betterment of the franchise.

Sometimes membership is regionally-based; sometimes there are minimum criteria to be eligible to be on the committee (e.g. not be in dispute with the franchisor, or have a minimum term of experience in the franchise). Sometimes the franchisor can help influence the selection, e.g. by specifying that it needs at least one marketing specialist on the team.

Some franchisors always host their regular meetings with the association at the company’s offices. Some pay the travel costs for members’ attendance. Some move the meetings around the country. Some prefer to hire a hotel meeting room, as it offers a neutral territory, and hence is not at anybody’s power base.

Harmonising the perceptions

On a bad day (and we all have them) franchisees can be perceived to be unreasonable, unrealistic and un-commercial, whilst on the other hand franchise managers or business development managers can be perceived to be interfering, always believing they are right, and often lacking the “street cred” of having been in the shoes of a franchisee – the “What do you know about my business – sat there at head office? I’m here at the sharp end” syndrome.

Taking these perceptions of individuals to a structural level, the franchisee/franchisor relationship will continually need attention at the interfaces. An association with a constructive and objective agenda can make its point with far more clout than an individual franchisee and yet, because it is speaking for a mass of franchisees, it can be expressed in a diplomatic manner whilst still getting the point across.

Striving towards a common goal

I recently heard the following from the chairman of a franchisee association: “Since neither party is going away, we should all be endeavouring to work together towards our common profit goal.” Wise words.

Some people like to say that the franchisor is interested only in turnover (in a franchise network based on a turnover-linked management service fee), whereas the franchisee is interested only in the profitability of his/her individual unit. This gives rise to the expression often used by franchisees: “Turnover is vanity; profit is sanity.” This is true as far as it goes, but it is redolent of short-termism.

Look at the bigger picture, take the longer view, and you will see that the interests of the franchisor and the franchisee are actually the same. Like parallel lines drawn in perspective, they in fact appear to meet in the distance.

Both parties are interested in the profitable well-being of the entire business. If the franchisees fail, the franchisor fails with them. If the franchisor fails, the franchisees are suddenly left high and dry.

Ongoing constructive dialogue and shared objectives, that are the product of properly-managed relationships between the franchisor and his/her franchisee association, can help in keeping the focus on the long-term goals that both can agree on, rather than the short-term tactics that would appear to divide them.

What powers should an association have?

This question is in danger of being redundant if the franchisees beat you to it and formed the association because they saw a need which could be addressed by “negotiating” with the franchisor from a position of strength. If this happens, the franchisor starts off on the back foot.

Invariably the newly-formed structure with which the franchisor is faced will be seeking greater influence than the latter will want to grant. Immediately, therefore, it is in the position of somebody who has fallen overboard from a boat, and is frantically swimming to the surface. This is not a good starting point.

Assuming you plan to take the initiative and recommend to your franchisees the forming of an association be clear with them what you expect it to do, what will be the extent of its influence, and be clear on who has the last word (and that has to be you – the franchisor).

You cannot abdicate the strategic direction of your franchise to a committee of franchisees and have the tail wagging the dog.

Every franchisor sees instantly that this is an anathema, but the opposite is also pretty unpalatable to franchisees: a committee made up of yes-men/ women who are there to tamely agree the dictates of the franchisor, thereby attempting to add a fig leaf of democracy and participation. In fact, it is more like the emperor’s clothes, and will quickly be seen as such.

The very act of helping the formation of a franchisee association means you are allowing some input to the decision-making process. You’re not so much giving power away as sharing it in certain clearly-defined areas. This may not come easily to you if it’s your own business which you have set up and built – so don’t give away critical powers.

Your association could be anything from a sounding board to something approaching a junior board. This is for you to decide, depending on what you want them to do, where you want their input, what areas are taboo, and your general management style.

The key is not to pass over the control of your franchise to the association. However, there are many areas in which the association can contribute in great strength to your franchise for everyone’s benefit. Obvious (and common) areas include: the choice of new technology for the business, and marketing plans.

It pays to remember that when your franchise network is up and running it is likely that the majority of good ideas – those that will drive the business forward, unleash more potential, attract more customers, or reduce operating costs – will very likely come from your franchisees.

There will also be a lot of unsuitable ideas. Using an association to screen, examine and debate all proposals in the areas that are open for discussion, sends a message to franchisees that you are prepared to listen to good ideas from wherever they come, and their views are valued. At the same time, providing common-sense prevails at the association meetings, the bad ideas will be rejected (with or without your need to be assertive about it) and the rejection will be far more easily accepted by your network if it comes from their peers, not you alone.

Whatever influence you want your association to have – from discussion forum to voting powers – you must have total clarity about the rules and the extent of their influence, and be firm if you see any attempt to gradually increase those powers. It’s your franchise, and you get to set the limit to which an association can be involved in the business.

Getting the best from your association

You will need to give careful thought to what matters (and at what level) you would like the association to deal with. This is closely linked with the powers you grant to the association.

If an association is not clear about its mandate, or if you exhibit weakness or indecision about it, you’ll probably find that it will start to make its own rules and it will decide the extent of its influence. So, to get the best out of your association – to ensure it’s a force for good – make sure it has a clearly-defined role.

There is energy and creativity amongst your franchisees: harness them. Give the association a clear mandate.

The franchisor should set the agenda for meetings (being sure to create the agenda in consultation with the chairman of the association, so that the items the members wish to discuss are on there, but in a managed way), and chair the meetings yourself. Make sure the association has plenty to do – or it will find things to do!

Examples might be to have a technology sub-group, or a sub-group to road-test new marketing ideas and report back. The old psychology applies: if franchisees have had a say in the decision, they will buy into it and help you sell it to the rest of the network. By the same token, if they are all opposed to an idea of yours, they could well be saving you from making a bad decision. A well-constituted association will not always be right, but it will always be worth listening to.

Structure

How formal should your franchisee association be? In large measure the degree of formality of the association should be a reflection of what you want it to achieve, which in turn is directly related to the powers you give it (or the powers it assumes for itself). Here are a couple of examples of the use and recognition of associations at a serious level.

In the case of the Independent Kall Kwik Franchise Owners’ Association (IKKFOA), senior managers from Kall Kwik meet with the franchisee members formally on a quarterly basis, and the subjects discussed provide serious input into the overall franchising direction and success of Kall Kwik. The franchisor supports the association’s AGM and its communications throughout the franchise. In addition, a number of user groups covering specialist areas meet and their reports are fed back and discussed with the association’s council.

At McDonald’s Restaurants, the National Leadership Group (NLG) represents the franchisee community at a strategic level in the company (comprising only franchisees voted onto the group by the franchisees as a whole).

The primary objective of the NLG is to ensure that system success is achieved through a mutually supportive relationship between franchisees and the company. These executive/NLG strategy meetings take place quarterly, to discuss the prevailing trading environment and agree priorities and actions to maximise business opportunities over the short to long-term. Additionally, franchisee priorities are discussed, providing the executive team with an opportunity to take these into account and agree actions.

There are also engagement sessions (regional communication sessions) with members of the executive and franchisees, marketing co-operative meetings involving members from both the company and franchisee community, and finance committee meetings, whose primary objective is to seek balance, fairness and flexibility to allow franchisees and the company to innovate, develop, compete and grow their businesses more profitably.

Unless you are in the McDonald’s or Kall Kwik league, you will probably kick off with more modest aspirations, but it just goes to show where you could end up.

Nobody said running a franchise network would be easy, and dealing with a franchisee association often isn’t. However, you don’t have to be all on your own in developing your business. In addition to the resources in your own company, you have the community of accumulated experience and best practice that exists within the BFA and its members, and you also have your own franchisees.

We all talk frequently about franchising being a partnership. Having a positive, active and focused franchisee association can be a very positive way of strengthening the partnership, and reaping benefits for the good of the entire franchise.

This is, of course, how it has to be because it is only with an established network that the franchisor can recoup the true benefits and economies of scale of operating a business in this fashion – hands off from the end user. That’s fine and just how it should be, but after a while, and sometimes a very short while, there will be the requirement to address the issue of franchisees wishing to sell on their businesses.

How then does this fit into the structured recruitment machine the franchisor has been operating? How does it advise its franchisee what to do? Should it even be bothered to become involved in the process, and does the franchisee have the right to sell to another individual anyway?

In the early days of franchising, this whole subject was fairly taboo with a certain amount of stigma attaching itself to the word “resales” as it seemed to imply a failure of some kind. Even as recently as five years ago there was only a handful of franchisors, who had in place a process that allowed their franchisees to sell on with any form of certainty about what they were doing.

These enlightened franchisors had documentation and systems in place so the franchisee could look to them for advice and support at this challenging time, just as they had always done on operational matters during their launch and lifetime as a franchisee.

We now have a franchise industry that is maturing and, whilst we see new franchised brands being established each year, there is a growing number of franchise systems approaching maturity and some whose networks are full as regards new recruits for new territories/locations.

For these, the selling of existing businesses is the only way forward for the particular brand. Either that, or they have to grow tangentially with the establishment of an additional brand, as opposed to expanding their current one, thus becoming a multi-brand operation.

Most established franchisors feel that to have a turnover of 10 per cent or so of their franchisees each year is vital to maintaining a healthy network as it constantly brings new blood and new energy into the business and allows the network to grow to the next level. This level of resales is considered the norm in franchise networks in the U.S. and so could also be considered as a healthy churn for a UK franchise.

Often in younger franchises and sometimes in the very early days, a franchisee will ask to sell and the franchisor is simply not geared up for this to happen. Here necessity and expediency drives the process and often causes the creation of hybrid systems that once they become embedded in a franchisor’s process can cause frustrations and problems in the future.

It matters not whether a franchise is young or mature, or still recruiting or full to capacity, the basic principles of ethical franchising mean franchisors should, as part of their operating processes, have a structured resale route available for their franchisees. This doesn’t have to be fully resourced in-house because, as with other specialist functions, it can be outsourced. It certainly doesn’t have to be a financial drain on the franchisor, nor does it have to be complicated or convoluted, it is simply a process that requires planning and implementing.

So where to start? Initially, the franchisor must ensure it has actually given its franchisees the right to be able to sell on their business; accrue a benefit from having operated the franchise; and realise the value of their efforts through a resale.

This means having a clause in the franchise agreement that specifically grants this right to sell on to a new franchisee. It is quite possible and indeed sensible to apply controls to the sale process and stipulate the hoops that both seller and purchaser need to jump through, but unless the right is there in the first place the process can become much more convoluted and even confrontational. Certainly for any franchisor, who entertains the thought of becoming a member of the BFA, it is essential to have such a clause in order to be granted accreditation.

The right to sell clause will set out the process the selling franchisee must follow; the fact that the franchisor will have the final say as to whether or not the proposed purchaser is acceptable to it as a franchisee; and will detail what charges, if any, the franchisor will make for this service and facilitating the change of ownership.

The charges and fees payable to the franchisor vary quite widely. Some use the resale process as an income stream and make it a profit centre in its own right, while others simply facilitate the process with little cost involved. I have seen all the following in various franchise agreements.

• A commission payment if the franchisor introduces the purchaser of either 2, 5, 10, 20 or even 25 per cent of the selling price.
• A transfer fee if the seller finds its own purchaser of either 1, 2, 5 or 10 per cent of the selling price, or sometimes a flat-fee structure, where the seller pays a fixed sum. This also varies widely depending on the type of franchise from around £2,000 to £10,000.
• Joining fees for the purchaser, charged in either of two ways, depending on the view of the franchisor. Some simply wish to cover their training and induction costs, while others levy the full joining fee, regardless of whether the new franchisee is buying a new business or a resale.

There are various views within the industry on these charges and different solicitors and consultants, and the BFA, will all have their own opinions, but whatever is to be charged should be enshrined in the franchise agreement. A key point here is that if the franchisor is making a charge in a resale, it should be proportionate to the value and the wealth-generating capability of the business being sold.

Having granted the right to sell, the franchisor also needs a system for the franchisee to follow when the latter decides that this is what it wants to do. Franchising is about providing a business operating system in return for a fee, and franchisors make great play about the support given to new franchisees acquiring a greenfield opportunity from them. Where they tend to fall down is by not having a structured and detailed process for when the franchisee wants to leave through a business sale.

If the franchisor doesn’t have a structured system, franchisees are left to sort out their own sales process and to a certain extent this is an abdication of the responsibilities of the franchisor. This is even more so when one can see how simple such a process could be and that it can be supported by external resources.

A well-structured resales process will include the following elements.

Guide to selling: This will describe the franchisor’s process in practical terms. It will contain notes on how the franchisee should notify the franchisor that it wishes to sell, describe the valuation process and give guidance, list the information the franchisee will need to prepare, set out the arrangements for the franchisor’s involvement, cover any fees that require paying and describe the legal completions process. There is no reason why such a document should not be included in the franchisor’s operations manuals as a permanent part of its franchise system.

Prospectus of sale or information memorandum: This is where the franchisee writes about its particular business. The franchisor can have a templated version of this with a pre-written introductory piece about the franchise. This is the franchisee’s sales document.

Independent valuation: This will allow the franchisee to get a realistic view of what it can expect to receive for its business because it will be based on the same information provided to purchasers and will be the basis used by the purchasers’ advisers for their own valuation.

By having the prospectus of sale prepared in advance, and obtaining a valuation that is independent of the both franchisor and franchisee, means that two of the biggest stumbling blocks to successful resales are reduced, if not totally removed. By having a detailed prospectus, the purchaser and its adviser will have all the necessary information at their fingertips. This saves the to-and-fro of initial discussions and will greatly add confidence that the proposed purchase is sound and all the information needed is available.

An independent valuation means that the initial asking price for the business will be broadly in the right ballpark. This avoids the gaping credibility gap which is the result of promoting a business for an inflated figure, when its actual value is considerably less. Overstated asking prices that bear no direct relationship to the true value of a business and are only set because the seller either needs the money, or has simply put a finger in the air are usually doomed to failure. This causes frustration in the franchisee who may turn to blame the franchisor for its failure to sell the business for them.

Businesses are valued on their ability to generate sustainable, transferable profits. Making an independent valuation part of the franchisor’s resale process will ensure its franchise network will come to understand these principles and franchisees will be able to plan for their eventual exit well in advance.

Naturally, large premises-based businesses where equipment is involved are more complex to value than simple van-based operations, but this doesn’t mean that the smaller ones should not be treated in a structured manner.

Sale and purchase agreement: This can also be structured or templated as part of a franchisor’s system. Once the seller and its purchaser have reached an agreement on price there is usually a legal sale and purchase process to go through. This may not be so onerous for the simple van-based franchise sale, but for most transactions there will need to be an agreement document of some sort. Here again the franchisor can add value to its offering of support by having its own solicitor hold a pre-drafted agreement that contains the key elements of the agreement already in place. This will save time and, therefore, costs because each seller’s solicitor will not have to produce a new sale and purchase agreement for each sale and the franchisor will also have retained a certain amount of control in the drafting. The form of the agreement would typically be as follows.

Part 1: This describes what is being sold, by whom, to whom, and for how much. Lots of blanks to be completed and totally non-contentious.

Part 2: This covers the sections pertaining to the franchisor’s interest in the sale, surrendering one agreement and granting another, and the use of the name, etc.This section should be non-negotiable and not changeable by either party

Part 3: This section sets out a best practice approach to the seller’s and buyer’s relationship and can to a certain extent be changed and tweaked to suit them but, given that the purpose of having a pro-forma document is to minimise cost, too many alterations should be discouraged by having an equitable approach when drafting the initial document.

The sale of a franchise is a three-party affair with the franchisor also agreeing to the purchase by countersigning the sale and purchase agreement, along with the purchaser and the seller. It is in everyone’s best interests that the document is well structured and drafted by suitably qualified BFA-affiliated solicitors.

Franchisees’ life cycles within a particular franchise will be of varying length, but all need encouraging and nurturing as they join, develop and become established within the network. So it is with their leaving. Systems, support and advice delivered internally, or via third parties, will ensure that both franchisees and franchisors mutually benefit from a structured and efficient resales process on this last step of the way.

Some of the world’s leading brands such as McDonald’s, Holiday Inn and Budget Rent A Car have established truly international networks building off the platform of their franchising know-how and techniques developed in their home markets. Others, including Marks & Spencer, Mothercare, Costa and River Island (all major company-run chains at home) recognise that franchising internationally offers the prospect of bringing their products and services to new consumer markets without the demands on capital, people resources, and risk which opening an owned and managed network overseas would entail.

What then are the basic keys to successful international expansion and what are the structure available? First, the structures.

The five basic structures

The basic strategies and techniques which can be used to enter a new market are: company run expansion, direct franchising, developmental franchising, master franchising, and joint venture franchising.

Company-run operations

Although the prospect of being in the position to control one’s self the establishment of the pilot outlets in a new market, and so the initial adaptation of the brand and system to local conditions is attractive, to do so oneself with a company-run operation overseas is fraught with a number of problems, particularly capital and people constraints.

It is very costly to dedicate sufficient resources to an overseas start-up, let alone tackle multiple markets. Who will staff and lead the overseas branches or subsidiary? Its business plans and budgets must be carefully considered. Organic growth using this approach will necessarily be slow – the world is a big place with many major markets to prioritise and choose between.

The locals know how to do business in their country, how much to pay for sites and construction, how to employ staff and generally get things done effectively. The learning curve for a foreign newcomer attempting to do this will be steep with many hard and expensive lessons to be learnt. Some major corporates have never recovered their enthusiasm for international expansion after disastrous and expensive initial attempts to do it themselves.

The franchising alternatives described below offer the prospect of more rapid expansion into more markets within a relatively shorter time frame, coupled with a requirement for far more limited resources and risk. The right overseas franchisee will provide both the resources and the market knowledge to drive forward and develop a new operation, insulating the home country franchisor from the risks and the mistakes which the local businessman or company will best know how to avoid.

Direct franchising

Direct franchising is really an extension of franchising in the domestic market. The UK franchisor will find and enter into franchise agreements directly with a number of individual franchisees in the overseas target market. The agreements will be very similar to those used domestically, but with a number of adjustments to deal with international issues, such as the deduction of withholding tax or service fees, currency conversion and other matters. The franchisor will need to provide the back-up and on-going support directly to its franchisees.

This technique is usually fairly limited in scope because the more overseas franchisees there are, and the further away geographically, the more difficult it is to provide the necessary support. Franchisees are consequently more likely to stray off the straight and narrow if the degree of supervision by the franchisor is reduced, as it will be, and the consistency with which the products and services, and the brand associated with them, are presented in the overseas market is likely to suffer. There is no local guiding hand on the tiller, no local country head office, and no local co-ordination of the overall country development, marketing, etc. There is a place for direct franchising, but usually on a fairly limited scale, for example perhaps for piloting in a new market relatively close to home.

Developmental franchising

Development franchising, often referred to as area development agreements, involves the franchisor granting the rights to an individual, company, or investor group to develop and operate themselves a number of outlets within a particular territory or region. A good example of this in the UK is Whitbread which was, until its recent sale of that business, a developmental franchisee of both Pizza Hut and TGI Fridays, rolling out the restaurants as company-owned and operated units, and, after many years and with the consent of its U.S. franchisor, also sub-franchising to third parties. This is the technique used by Starbucks internationally

The advantage for the franchisor is that it has only one franchisee in a region or country to liaise with, and such a franchisee is likely to be significantly resourced, experienced in operating businesses in its market, and consequently less likely to need significant support from the franchisor. Developmental franchising is typically used in the retail, hospitality and leisure sectors, where significant investment is needed to build and roll-out and run big ticket retail stores, restaurants or hotels.

The development agreement will typically require that a specific number of outlets must be opened within a prescribed period, say one store to be opened within the first 12 months, with a required openings schedule stipulated over the following years. In exchange for this level of commitment to invest in the market, the franchisee is usually granted territorial exclusivity, provided the openings schedule is met, and fairly long-term rights, typically between 10 and 25 years.

An up-front fee, sometimes significant and running into six figures, is typically paid to secure the development rights. The franchisor is after all parting with its rights to develop the territory in another way.

The operation of each unit will usually be regulated by an individual franchise agreement. There are a number of reasons for structuring arrangements in this way. An initial franchise fee will typically be paid for each new outlet which opens, as well as weekly, monthly or quarterly continuing fees based on sales. As in domestic franchising, there will inevitably be an obligation to spend a required amount on marketing and promotion, and perhaps an obligation to pay a small percentage to the franchisor for the global marketing of the brand.

Master franchising

Master franchising is most frequently seen in the service sectors, or where the nature of the business or service requires the cloning of multiple outlets, each with a hands-on owner/operator. Kall Kwik is an example in this country of a master franchisee of a U.S. franchisor.

To secure the rights to develop a territory, the master franchisee will, like the developmental franchisee, again usually have to put down a fairly significant sum up-front, with a commitment to pay to the home country franchisor both on-going percentage fees based on total network sales, and typically a slice of the initial fee charged for each outlet which opens.

The fundamental difference from the developmental franchisee is that the main business which the master franchisee, sometimes referred to as the sub franchisor, must establish and operate is the business of being the franchisor for the particular system in the territory for which rights have been granted, rather than just operating outlets itself.

Master franchising is usually done on a country basis whereas developmental agreements are just as likely to be regional within a country as for an entire country. Gowrings is an example in this country of a significant multi-unit Burger King developmental franchisee which now operates over 50 restaurants.

The master franchise agreement will, like the development agreement, inevitably impose a required schedule of numbers of outlets to be opened within a particular time frame. To fail to require this, exposes the franchisor to the risk that the target market will be under-developed and, notwithstanding the problems in restructuring the network which would ensue, the franchisor must reserve the right to terminate a master franchisee who is not adequately performing.

The parties will often agree that the master franchisee must open and operate a number of pilot operations itself to prove the system works in the culture, market and business environment of the overseas country; to allow for the almost invariable element of adaptation and tweaking of the business concept to best fit local conditions; and to provide a seedbed and training base for the franchising and support personnel which the master franchisee will need to support its network as it starts to recruit and grow local (sub)franchisees. Any company-run outlets will also provide a useful source of revenue as the business develops to the stage where its franchising operation and revenues themselves reach critical mass.

Besides the agreed fees and development schedule, other features of a master franchise agreement follow from the local franchising function which will become the primary business of the master franchisee. Issues will include the need to develop a local training function (using translations of the home country operations manuals), possibly a training centre and the need to follow the franchisor’s tried and tested methods of franchisee field support and motivation.

The franchisor will need to ensure that the form of sub franchisee agreement which the master franchisee will be entering into with its sub franchisees properly imposes the necessary controls and obligations needed to ensure that their businesses are operated in accordance with the system and the reputation of the brand maintained. The master franchisee will be contractually obliged to monitor sub franchisees’ performance and, ultimately, to enforce these sub-franchise agreements. Careful consideration needs to be given to whether the franchisor has a direct right to terminate sub-franchisees.

The term of the master franchisee’s agreement must be long enough to allow it to recoup its investment in building a proper country infrastructure, and to issue sub franchise agreements with a term long enough to attract sub franchisees and enable them to do the same, typically 25 – 50 years.

The size of the up-front and continuing fees charged by the home country franchisor for the master franchise is critical. They must be set at a level which both covers the expenses the franchisor will inevitably incur in finding, training and establishing the master franchisee in business, as well as permitting a reasonable long-term income stream to flow back to the home country. They must not, however, be set so high that the master franchisee will feel under pressure, either not to invest sufficiently in its support infrastructure – which is essential to develop and maintain the brand and the network – or to gouge its sub franchisees and charge them fees which are disproportionate to the scale of their businesses and the profits which they will need to generate to make the proposition attractive.

Generalisations are dangerous here. Each business must carefully evaluate its approach based on realistic business plans which take into account the needs of all parties, the costs of doing business in the new market and the level of profitability available, as well as the need to enhance and maintain the image of the system and the brand name.

In a master franchise arrangement it is also crucial to address carefully what will happen, as a matter of local law, if the master franchisee should fail and either want to sell its business, go bankrupt, or if the home country franchisor needs to terminate the relationship.

This is a very important subject which calls for the legal structures to be carefully planned up-front in both master franchise and developmental franchise agreements. The overseas franchisee may wish to sell its business, or bring in partners. It is crucial to the long-term focus to the local business and maintenance of the network’s image and reputation that the control and perspectives of the master franchisee, who was probably selected extremely carefully at the outset, do not change for the worse due to the influence of new shareholders.

The franchisor will therefore want a qualified right of approval of new owners, and certainly a veto over potential competitors becoming involved. It will also be sensible to include options and pre-emption rights to buy-out the master franchisee which will be triggered both by an impending sale or business failure, and on termination.

In a master franchise situation, it is also important to consider the fate of the sub franchisees if the master franchisee fails. Will the home country franchisor wish to step in? It will probably not want to be obliged to do so, but will certainly want to investigate how, as a matter of local law, the contracts should be set-up at the outset so as to have an enforceable option to do so itself, or through a replacement master franchisee, in order to protect the image and reputation of its network, and also so as not to put at risk its income stream from the country, which over time could become very substantial if a large network of sub franchisees is established.

Related to this, the franchisor will want to build in precautions to prevent the sub franchisees taking the opportunity to jump ship to a competing system, again with the risk of loss of a major income stream. Taking over in these circumstances is never easy, but the legal mechanisms usually exist, if carefully planned for in advance, to give the home country franchisor the rights and controls it needs.

Joint venture

A joint venture is created where the home country franchisor agrees to invest and become a shareholder partner in the overseas company to be established by the foreign franchisee. The joint venture company established in this way, in which the franchisor owns, say, a 50 per cent or perhaps 25 per cent share, itself then becomes the overseas country franchisee and is granted either developmental or master franchise rights for the territory by the home country franchisor.

There may be a number of reasons for doing this. The franchisor may wish to share in local profits, as well as receiving its income stream of continuing fees under the franchise agreement. Of course, there is likely to be a price to pay for investing in the capital of the overseas company with the risks which arms’ length franchising avoids, though the risk in this situation is, of course, being shared with the local partner.

Some countries’ legal environments, exchange control or foreign investment laws may make it difficult to repatriate the level of royalty fees which the franchisor would normally want. This may result in the restructuring of the arrangement into a joint venture with a right to receive dividends out of profits, as well as a reduced level of continuing fees. Developing countries’ investment approval regimes may insist on some inward investment.

Sometimes, the prospective franchisee may have all the other characteristics of the ideal local country franchisee, but insufficient funding, which may lead to the franchisor deciding to chip in.

A joint venture (or shareholders’) agreement will regulate the parties’ rights and obligations as shareholders in the new company. In addition, the new company will enter into a developmental or master franchise agreement with the franchisor. As a result, the franchisor ends up wearing two hats with different sets of rights and obligations both as franchisor, and separately as a shareholder in the franchisee company.

There are a number of issues and potential problems which can arise in joint venture company arrangements, basically flowing from the partnership relationship, such as the local partner’s authority, limits to authority, future funding, and what happens if things go wrong.

The franchisor is quite separately in the strong position of also controlling the joint venture company’s rights to operate the system through the franchise agreement which, depending on the facts, it might become entitled to terminate, enabling the franchisor to start again with another franchisee, even if the relationship in the joint venture company has broken down.

Key considerations

• Don’t take your eye off the ball at home. Plan for, and resource, the exploratory steps sensibly. Flights, accommodation, key management time away, and finding and evaluating potential partners all have a cost. Ensure that the domestic operation can bear it and budget for it realistically.
• Plan and implement a sensible trade mark protection programme in advance. The mark is the foundation of the rights you will be granting overseas. Even large companies have learnt to their eternal cost that (generally speaking) the first to register a particular trade mark in a country has the legal right to use it. Trade mark piracy does exist, and if you harbour international ambitions, plan to spend and budget for the fairly significant protection costs which a programme of international trade mark registrations will cost. Without the mark you may have much less to franchise! It is vital to develop a suitable strategy to do this before you attract the attention of those who might see the opportunity to steal your brand and exploit your reputation in this way. Stopping it after the event may be impossible, effectively preventing you from entering an overseas market at least under your usual brand name. At the least, conducting a fight is likely to be a protracted and very costly exercise.
• Getting the right country partner is critical, and a far more serious problem, if you get it wrong, than an occasional badly recruited franchisee at home. Take it very carefully!
• Spend some time analysing and prioritising overseas markets. The world is a big place and with limited resources where are you going to go in the next five years – specifically?
• Don’t rely on unsolicited contacts from overseas. Try to be proactive rather than just reacting to the inevitable enquiries you will receive, but don’t necessarily write them off either. Someone has had the wisdom and energy to identify you, and decide that your concept will work back home. Establish sensible criteria and characteristics for the ideal country or regional franchisee. Do some background enquiring and due diligence to check out the prospective franchisee.
• Most importantly – will your business concept actually work in your target country, or are there cultural, economic, or industry-competitive differences that are likely to present barriers? Eating habits may be significantly different; property, tax or import duty, or social costs may fatally skew the financial figures. In some cases, there may also be legal barriers. Increasingly, countries are adopting franchise-specific laws which must be addressed at a very early planning and prioritising stage, as failure to comply, for example with an obligation to provide certain information to a potential franchisee before entering into negotiations, can have serious consequences.
• Carefully work out your package in advance. Don’t negotiate on the hoof.
• Consider whether there are tax advantages of offshore holding structures; the use of branches and subsidiary companies overseas, or trade mark holding companies established at the right stage can result in greater after-tax resources, either to repatriate as profits, or from which to fund further international expansion.
• Get the best advice from those who have done it successfully before, and check out the credentials of those who claim they have. This really is an area where getting the best legal advice is (almost) worth its weight in gold! Remember the ‘ticking time bombs’ of gaps or poorly drafted provisions in agreements which have been done by those with insufficient experience of international transactions. You won’t necessarily realise this until something goes wrong down the line – then it may be too late.

This new qualification provides formal recognition of an individual’s professional knowledge and experience in franchising.

The individuals are involved in a variety of sectors, representative of the breadth of the association’s membership but all have demonstrated their commitment to professional development and ethical franchising. Professional advisors to the industry as well as franchise owners, directors, managers and franchisee support staff will all be able to benefit from the learning and recognition that the QFP provides.

Linked to the BFA’s seminars and key events, the QFP has been introduced in association with The Franchise Training Centre, incorporating a number of their workshops together with the BFA’s own core learning events. The qualification is proving to be a valuable tool in the training and retaining of staff, offering a beneficial addition to people’s skill sets. Through attending a number of prequalified events and seminars, individuals will gain points towards their QFP – over a period of up to three years. Before achieving the qualification, all candidates must accumulate the appropriate number of points and attend an interview with the expert panel.

Andrew Quail, panel member and head of quality standards and compliance at the BFA, explained: “We are delighted to see the first round of successful candidates achieve QFP status – it is testament to their hard work and commitment to ethical franchising, something which the bfa is constantly striving to uphold.  We firmly believe that the QFP will form an important step in the evolution of the franchising sector over the coming years, offering people a tangible way of representing their adherence to ethical practices.

The achievements of this first group are something for the industry and us as an organisation to be proud of.”

The initial group of recipients of the QFP is as follows:

• Simon Bartholomew
• Shirley Hughes
• Mark Scott
• Brian Duckett
• Paul Monaghan
• Iain Martin
• Rory Waterer
• Caroline Davis
• Alan Wilkinson
• Kevin Noble

In order to retain their QFP status individuals must demonstrate Continuous Professional Development by attendance at further events in order to obtain the minimum points required to maintain their qualification.

The BFA is the voluntary self regulating governing body for franchising. Since its inception in 1977 the association has worked to develop and continuously improve the standards of good practice in franchising and to acknowledge franchisors who meet these standards. The franchise sector in the UK is now worth more than £12 billion to the economy through 36,900 franchisees working with more than 890 brands.

Having looked at a number of aspects of the firm’s overheads, Freeman has saved to date £83,000 and an on-going 11 per cent of its fixed-line phone calls, and he is now making further savings in other areas.

Jim Wilkinson, group finance director of Sportingbet, which had a turnover of £1bn last year, said: “I have been genuinely surprised and impressed by the savings Lee has found as I really thought I was in a good position in terms of our existing contracts. What is more these savings have been delivered without any effort on the part of me or my team, or disruption to our core activities.

“Lee has just got on with the job and delivered impressive results in a very   professional manner. Most importantly, his savings have made us realise that as an organisation we need to change our attitude towards costs management.

“First and foremost, we want to work with our staff to change their psychology and working practices in relationship to expenditure. Lee will continue to work closely with us to help us achieve this goal. He is already working on new projects to review our insurance, travel and broadband expenditure. I definitely see him as a member of our management team,” said Wilkinson.

Freeman initially reviewed Sportingbet’s expenditure in fixed and mobile phones, office supplies and IT consumables. A month later his brief was extended to cover stationery, where he negotiated a 33 per cent reduction that has brought savings of £23,000. Further savings have been an estimated £40,000 on mobile phones and £20,000 on international toll-free numbers.

Auditel has a UK network of 200 cost consultants serving thousands of business clients.

Montgomery, who runs three coffee shops in Bristol, was competing against major Costa Coffee franchise chains in London and throughout the country.

He was presented with the award by John Derkach Managing Director, Costa Coffee (Global) at a glittering ceremony at London’s St Pancras Hotel.

However, the self-made businessman has no intention of resting on his laurels with plans for 60 more coffee shops in the pipeline. “Running a franchise business is all down to the quality of the staff you have,” said Montgomery. “This is a fantastic award for everyone that works with us in Portishead, Bristol and Henleaze.”

Montgomery and business partner wife Lynn met in Thailand where Montgomery lived and worked for 10 years opening a dozen franchise businesses employing more than 400 people. Returning to the UK the pair continued to run major franchise outlets and now hold the franchise from Costa Coffee for Bristol and the South West.

“At the heart of Costa Coffee are the baristas, who hand-make the drinks that we serve,” added Montgomery. “We have some great baristas in this area and we are aiming to train more as we expand the business. Working in a Costa Coffee shop is not just a job for students and those between jobs it is a real career for those who want to provide a much-needed service for the public.”

Costa Coffee is the UK’s largest coffee house chain with 1175 outlets across the country. The firm recently won the Marketing Society’s “Global Award”, beating global mega brands Yahoo, Honda and Nokia to the top prize.This success followed hot on the heels of Costa winning Marketing Week’s coveted “Brand of the Year” in May, placing Costa in the company of recent winners Tesco, O2 and Innocent.