How does a franchisor test its business model?

Author: Shelley Nadler

answered by Shelley Nadler

Legal director at Bird & Bird

Shelley Nadler writes:

Having developed a business concept, it’s essential at least one pilot or operation should be established by a franchisor in order to ensure the proposed franchise system works in practice.

As a general rule, such pilot tests should be open for at least a year, particularly where seasonal factors have to be taken into account, and preferably two years.

Ideally, there should be more than one pilot test to ensure the franchise business model is robust and to eliminate any distortions arising from the results of one unit through the close attention it receives or the uniqueness of the location.

The aim of running a pilot test is to help understand a wide variety of potential issues and concerns, including whether the business will be successful; how it can be improved; the acceptability and availability of the product or service; the location of outlets; staff selection; the most desirable combination of layout, equipment, décor and design; and opening hours.

A potential franchisee should take great care to ensure pilot testing has been fully and thoroughly carried out. There is a growing trend to start franchising without running pilot tests, particularly when the proposed franchise business relates to a ‘new activity’ that the franchisor does not wish other businesses to copy.

However, the essence of a franchise is that a franchisor is providing a proven, successful business to franchisees.

Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.

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