Leveraging your assets by licensing has long been part of the business world. In a number of countries it has occupied a significant percentage of the economy – and for many decades. The mother of American basketball player Michael Jordan recognised the potential rewards when she negotiated her son’s deal with manufacturing giants Nike.
Mrs Jordan made certain the deal included a substantial upfront payment, as well as ongoing revenue from a percentage of trainer sales. Another way to achieve long term financial success is to franchise your business. If you operate a successful enterprise, with a proven business model, and you want it to grow even further, then franchising the company is one option.
The key is to get the deal correct from the start. Structuring your model and documenting it properly will help to ensure its future success. Any such business model must be mutually lucrative, in order to attract partners. Nike would not have accepted Mrs Jordan’s suggestion had it not been attractive to them. The deal was complimentary for both the Nike brand and Michael Jordan.
And ethical franchisors take the same approach, by offering a business model that compliments both sides, in order to achieve mutual success. For those of you considering ways of leveraging your business assets, there are five steps along the journey: (1) The Deal; (2) Take Advice; (3) Structure Your Model; (4) Document It Thoroughly; (5) Ensure Both Parties Benefit.
The deal
If you are a successful and proven business, and you are seeking to leverage your assets, then the route forward could be to embrace business format franchising.
Business format franchising enables others to take advantage of your brand, by adopting its systems and marketing knowledge. They will also benefit from your company’s strong reputation for integrity, good customer service and ethical business practices.
In return for granting your new business partners these obvious benefits, you will collect an upfront fee and ongoing revenue, while making certain your franchisees are properly trained and supported throughout their journey. Among the many successful businesses to franchise their models are: Costa, Vodafone and Specsavers. This proves the franchise model is an established route for business expansion.
The aim for all franchisors is to achieve a positive national profile – due to demand for their products and/or services – and to expand into markets or territories where they do not already have a presence.
Take advice
The British Franchise Association (BFA) is the leading trade body for the franchising industry in the UK. They recommend that prospective franchisors seek advice from franchise specialists and consultants.
The key to successful franchising is to attract the best franchisees to your business. And one way to secure good advice is to use consultants, accountants or solicitors, which have all been vetted and recommended by the BFA.
Structure your model
Brand
To develop a franchise network in the UK, you will need to ensure that your brands are registered and protected here. Registration is vital for the growth of your business in the marketplace, as it grants you the rights to use the brand (subject to renewal fees). This also applies to securing local online domain names and registration of company designs.
Run a pilot operation
Before taking on your ‘first official franchisee’, you must prove that a second business has already adopted your systems and been successful. To do this, you need to run a pilot operation (or preferably two). The pilot operation can be a new business owned by yourself, or it could be a franchisee to who you have offered preferential terms, because this exercise is a learning process for both of you.
Choose your growth structure wisely
This involves setting up a limited company in the UK and developing the franchise yourself. A Master Franchise is a company or individual appointed to develop the network in a particular region. The Master Franchisee trains, recruits and supports his or her franchisees, while you continue to provide support to the Master Franchisee.
The Master Franchisee generally receives their income from franchise fees, plus a fee based on sales turnover. You, as franchisor, receive your income from products sold and/or a royalty fee from the Master Franchisee.
An Area Franchisee is similar to a Master Franchisee but instead of operating the brand in an entire country or large region, they are appointed to grow your business in a specific smaller area. There are other options too, but I won’t go into these in this particular feature.
Strategy
Be clear about what you are trying to achieve by franchising your business. You may wish to develop a property portfolio or look to diversify revenue streams. Each one will impact what your franchise documentation needs to contain or what type of support team you will have to employ.
Document it thoroughly
Contracts
English law does not currently prescribe that you are required to have documentation to operate a franchise. Neither are you subject to any formal registration or disclosure process. Generally, you are not liable to make payments to franchisees when they cease to operate a franchise business in England.
But without specific legislation governing the operation of franchises, it is more important than ever to develop robust contracts that specify the obligations of all parties.
Legislation
There are key areas where English laws impose specific obligations on businesses – namely data protection and anti-bribery, competition laws and trading schemes.
Policies
Get advice on how to structure your contracts. Nowadays, this needs to ensure that measures concerning the use of social media and the internet are enforceable.
Competition law compliance
Prevention of competition is a key area for all franchisors. Contracts should include appropriately drafted restrictive covenants to protect your business interests and your brand, once a franchisee ceases to operate an outlet. To be enforceable these must be carefully drafted, so take advice.
Non-disclosure agreement
You should ensure that you have signed non-disclosure agreements with potential investors prior to them receiving sensitive information regarding your business model. Potential investors may need to pay you a deposit, to demonstrate their commitment to the project.
Marketing materials
Ensure that your marketing and recruitment material has been vetted, so that it complies with English advertising laws which protects against misrepresentations. Take special care regarding profit forecasts. This, if not done thoroughly, can land you in hot water. This is especially important post-pandemic because transparency needs to be even greater than pre-2020.
Competition laws
Pricing controls cover a particularly sensitive area. Agreements that seek to control pricing in a franchise network – by imposing minimum or set prices – could fall foul of competition law, thus rendering your agreements unenforceable. Some restrictions on excessive pricing may be permitted but these must be carefully drafted.
Ensure both parties benefit
Although you are always the boss, the key to successful franchising is to keep your franchisees happy. All franchise deals should be mutually beneficial and equally profitable for both parties.
The franchisor must demonstrate a willingness to share the pain of a franchisee. Successful franchisors get this balance correct. Mrs Jordan knew that her son Michael, although a rookie at the time of signing the agreement, would bring Nike immeasurable riches in the long term. Your franchisees will develop great ideas, suggest improvements and offer business insight. Likewise, they need your support and guidance throughout the journey.
Conclusion
History has illustrated the benefits of a well-negotiated collaboration. If your organisation has a proven and successful track record, then franchising your business may offer you a route to expanding it across a region, a country or even the globe. This would ultimately achieve greater growth and financial rewards for both you and your network.
