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Three Important Things You Should Know Before You Franchise

1. Before you even think about it – You cannot franchise your business unless you have already achieved the following:

  • (a) You must have a business that is profitable. It must be profitable enough to produce a good profit to your franchisee even after you deduct franchise fees, not only those ongoing fees but, the initial fee also.
  • (b) Generally the business must have been in existence long enough to know that it can survive a range of economic environments.
  • (c) The business must be systemised and the systems must be recorded in a detailed and professionally drafted operations manual. It is better that you complete this job yourself, but you will need someone to proof the document. Let me repeat. Detail is critical.
  • (d) The business must be unique. The operations manual must reveal the uniqueness of the business. In a coffee franchise, for example, the operations manual does not only describe how to make a coffee. It describes how we, in this franchise system, make a coffee. If an operations manual is the text book description of how a coffee is made then the document is failing its purpose. There must be some uniqueness about the document. It may be what the waiter says, the way the cup is placed or the unique chocolate that accompanies each cup. The operations manual must focus attention on the differences from the standard processes that others may employ. The differences make the system, and they need not be mind blowing. It is often the little things that do the job.
  • (e) One operation is not enough! The business of franchising is about helping franchisees achieve success using your system. It is obviously essential to have the knowledge of how to run the franchised business. It should be just as obvious that you will need to develop the necessary skill to run head office. Operating a franchise system requires an entirely new skill set from the original business. This is a concept too many first time franchisors do not respect. Before franchising your business you must open at least two more operations, and run these successfully at a profit.

2. The set up of the structure. At this early stage it is essential to look at your goal and think big. There may be no second chance to change things once the franchise system is operating. There are some very simple, inexpensive things that can be done at the inception of the franchise system that can protect your assets, discourage would-be litigants from suing you and minimise tax. After operation commences the great ideas that come with experience will cost a lot more to implement.

If your franchise system requires premises should these sites be controlled by the franchisor or the franchisee? Careful thought needs to go into how this system should work. The companies that have the risk should not in most cases be the companies that hold the assets. This is a fundamental rule. We have set up many franchise structures, please contact JJ Riba & Co so that we can help you learn from the mistakes that others have made.

Even the decision in relation to who holds the leases is not a decision that can be made lightly. In this current economic environment many franchisors may find themselves wishing that they had not taken on the responsibility for the lease. If they had not, then the landlord would be chasing the franchisee for payment and may not be chasing them! Do I take the risk associated with the lease of the premises or don’t I? There is always a third option. Why not do both, take some leases and leave others to the franchisee? Which you may take the risk on, depends upon the importance of that site to your system.

3. The Franchise Agreement. Franchising is all about consistency. Consistency in process, in product or service, and consistency across a range of franchisees. The burger must be made the same way, every time, regardless of when or where.

This process of achieving uniformity starts with the franchise agreement. It is very difficult to properly operate a franchise system, if each franchisee within that system, operates using a different Franchise Agreement. Yet each franchisee is likely to request (or demand) changes to the agreement that you are offering. Even what may seem minor variations may create unnecessary work. Franchisors should not generally need to change their standard franchise agreement if it is properly drafted from the start.

Franchisees may draw negative conclusions about a franchisor who is willing to change the standard Agreement. Agreeing to amendments may show a lack of experience, and may even give the appearance of desperation. Disclosure documents operate on the premise that the agreement is the same (taking into account changes over time) across all franchisees in the system.

With these fixed terms however comes the responsibility to make sure that these standard terms are fair. The national unfair terms legislation (Trade Practices Amendment (Australian Consumer Law) Act 2009) does not apply to agreements between franchisees and franchisors. Nevertheless, the existence of this legislation shows that our law makers are focused on this issue. It is essential for franchisors and their lawyers to understand the purpose of each clause in the franchise agreement. Much of what may appear to be unfair at first glance, is necessary so that Franchisors can protect their own interests, and protect the system for the benefit of all franchisees. There is obviously a difference between a clause which may appear to be unfair but, is genuinely needed, and a clause designed to take an unfair advantage. If your system is to grow and prosper you will need to learn the difference.
It is not an easy process but with some discipline and dedication it is not beyond reach. If you need help contact J J Riba & Co

By: jjriba http://franchiselawyers.wordpress.com

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