Setting up a franchise is an exciting time for both franchisor and franchisee. And as long as both parties stick to their initial obligations it will be the beginning of a beautiful friendship
In the early days after purchasing a franchise, the franchisee will be heavily dependent on the franchisor and will need lots of support and guidance. As time goes on the franchisee becomes more familiar with the business, more self-sufficient and less reliant on the franchisor. This is reflected in the obligations in the franchise agreement. Typically, the franchisor will have more initial obligations than the franchisee but will have relatively few ongoing obligations, whereas the franchisee’s will be extensive.
The top-secret recipe of the franchise world, the operations manual is the blueprint for operating the business and sets out the detailed systems and procedures upon which it relies. A key, initial obligation of the franchisor will be to make a copy of the manual available to the franchisee; however the operations manual will only ever be provided on loan and must be returned at the end of the franchise term. It may be made available in paper form, although increasingly franchise networks are using intranets and providing access to the manual in electronic form only.
In new networks, there is a risk that the operations manual will be underdeveloped and might not contain the level of detail or scope of processes that the franchisee expects. It is therefore advisable for the franchisee to ask to view – but not retain – a copy of the manual before they join the network to satisfy themselves that it is sufficiently comprehensive.
A key component for anyone joining a franchise network is the initial training that’s offered. From a franchisee perspective, the training must be comprehensive enough to teach the franchisee everything they need to know to start operating the business confidently. From a franchisor perspective, the initial training is critical to ensuring the franchisee starts on the right foot and will follow the system properly.
While the franchise agreement will usually include a high-level obligation on the franchisor to provide initial training, it will rarely specify the detail of what’s covered. Sometimes these details will be set out in the operations manual but, either way, it’s advisable for potential franchisees to check the extent and scope of training that will be provided.
The training itself will depend on the network and the nature of the business. Some franchisors provide purely classroom-based training, whereas others will include some on-the-job or in-the-field training. The cost of initial training is usually included within the initial fees, although travel and living expenses will usually be down to the franchisee.
Most franchise agreements give the franchisor the opportunity to terminate the franchise agreement if it becomes apparent during the initial training that the franchisee is not up to scratch. In that case, the franchisee would still be expected to pay the costs incurred by the franchisor up to the date of termination – including the initial training – and so the franchisee could lose a significant proportion of any deposit or other fees paid. The franchise agreement ought to specify the maximum amount that the franchisor can charge in this case.
But franchisees won’t just need support around how to handle day-to-day operations: the franchisor will also be expected to provide advice and guidance on the initial set up of the business. The type of guidance will vary from network to network but could include advice on selection and fit out of suitable premises, initial PR and promotion for the business, recruitment and training of staff and specific registrations or consents needed in that particular industry.
Initial stocks and equipment
Another important factor when it comes to getting a franchise outlet set for opening is making sure it has the materials and resources it requires. The franchise agreement will usually specify the initial stock and equipment that the franchisor will provide. Sometimes the franchisor won’t provide items direct but will specify which ones are required and the approved suppliers the franchisee is allowed to buy from.
So far, many of these obligations have focused on what is required of the franchisor: that’s because the main obligation on the franchisee will be to pay the initial fee. Whilst franchise agreements will always specify the amount of the initial fee payable, it is often less clear what the fee covers. Potential franchisees should ensure they are clear about what’s included and any additional charges that may be incurred. For example, some networks will provide an initial pack of stock and equipment within the fee but others make an additional charge for this.
The general view is that initial fees ought to cover the franchisor’s initial costs but shouldn’t draw a hefty profit. Otherwise, there is a risk that franchisors will be more interested in selling new businesses than in supporting their existing franchisees.
As with franchisor obligations in the franchise agreement generally, the franchisor’s initial obligations are often quite vague. It is important that potential franchisees understand the detail of what will actually be provided so that they can assess whether the network is good value for money in comparison to the fees payable. Potential franchisees need to be satisfied that the level of support and training will be sufficient to enable them to operate confidently. Similarly, the franchisor needs to ensure that enough support is provided to enable the franchisee to understand and implement the system, standards and requirements of the network.