What to look for in a franchise package

John Pratt, partner at Hamilton Pratt solicitors, reveals the critical components all good franchise packages should contain

Franchising is sometimes referred to as a ‘business in a box’. It is, in fact, much more than that, but the business in a box concept does conjure up some essential elements of a franchise.

When you take a franchise, you know that if you do what the franchisor requires you will have a successful business. How successful your business will be depends on your abilities and determination to work hard, but a franchise is supposed to ensure you will not fail.

Statistics show that very few franchisees fail and those that do almost always fail because they did not follow the system or have taken a franchise from a franchisor that has not, in fact, created a proper franchise package.

In order to ensure that what you are buying is the genuine article and not something that is being marketed as a franchise when it is nothing of the sort, here’s an idea of what a franchisee should receive from the franchisor. Each of the elements is an essential ingredient for a successful franchise, as a franchisor’s failure to provide one element could substantially prejudice your ability to operate a profitable business.

Proven business system
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First,you have to ensure that what you are buying is a proven business system and not simply a clever business idea. How do you ensure this is the case? The simplest way is to take a franchise from an established franchisor that has a large number of successful franchisees.

Do not necessarily accept what the franchisor says in its marketing materials. You need a full list of all franchisees so that you can check that the levels of profitability, turnover and so on that the franchisor claims are, in fact, correct. With franchisors that do not have an established network, you will inevitably be taking a bigger risk, but you must establish that they have pilot tested the franchise, which means they have operated two or three pilot franchises for one-three years to ensure the business they have operated themselves can be replicated as a franchise.

Never lose sight of the fact that what you are buying is a proven business method - the emphasis is on the word ‘proven’ and the burden of proof is on the franchisor to prove to you that you will be successful based on past experience.

Know-how
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Secondly, an experienced franchisor will have substantial know-how about how to run the business. This knowledge could relate, and indeed should relate, to all elements of the business. In other words, a franchisor will provide a franchisee with advice on how to market the business, stocking requirements, hours of opening and so on. All of this will be contained in a detailed document called the operations manual.

Before committing yourself to taking a franchise, you should be shown a copy of the manual. You will not be able to take it away from the franchisor’s premises because it contains all the franchisor’s confidential information, but you do need to be given the opportunity to review the document to ensure it is detailed and contains the sort of information you are expecting. The manual will be constantly updated by the franchisor to ensure that how you operate your business flexes with developments in the market place.

Right to use a brand
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Thirdly, you will be given the right to use a brand. Brands in franchising really are important. The best example of a franchise brand is, of course, McDonald’s. Whenever a prospective customer sees the McDonald’s name and the Golden Arches, they know what they are going to receive and, as a result,become customers of that business. This gives franchisees a huge advantage.

Almost all franchisors have a registered trade mark. While it is not fatal if the franchisor’s trade mark is not registered, it does make it harder for the franchisor to prevent third parties from making use of an identical or similar trade mark and may also indicate that the trade mark used by the franchisor is not sufficiently distinctive.

Training and advice
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Fourthly, you will receive training and advice. Throughout your period as a franchisee, the franchisor should provide continuing training, as well as offer meetings and an annual conference as and when there are a sufficient number of franchisees within the network.

Good communication between franchisees and their franchisor is of fundamental importance. Inevitably, problems will arise and franchisees may need some assistance. That assistance could be in the form of a telephone call, an email or the need for a member of the franchisor staff to attend a franchisee’s premises or place of work.

You should ask the franchisor what continuing back-up it provides to franchisees and what form that back-up takes. Many franchisors have individuals who are knowledgeable about the system continually visiting franchisees to provide on-the-spot assistance.

Most franchisees have never run a business themselves and are likely to have very little experience of the particular market in which they will be operating their franchise and, therefore, initial training needs not only to be of a technical nature relating to the franchise’s products or services, but must also include general business advice concerning book¬keeping, marketing, VAT and so on.

Other elements
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Finally, you will receive other elements that may include an obligation on the franchisor to promote and market the franchise network - usually using contributions from franchisees - a supply of stationery, products and equipment, beneficial supply terms based on the fact the franchisor is able to negotiate on behalf of all franchisees, and advice on locations if franchisees operate from premises.

Many franchisors licence software that franchisees must use within the franchise system and sometimes this software is bespoke in that it has been created specifically for the franchisor.