When franchising a business, you can’t work out the myriad of different items to be carefully described in any meaningful franchise agreement, unless you know how a franchise group is going to work. Even with the best will in the world, lawyers are not in the best position to understand the people side of a franchise group and the business-specific technical issues which will determine how the franchise structure will work.
Yes, good franchise lawyers will have a precedent they use to structure a franchise agreement. And good franchise lawyers will have the experience to know most of the questions to ask to fill in much of the detail. But a good franchise lawyer also knows every franchise group is different and, to give their clients the protection they will need when things go wrong, they will be looking for instruction on how the group is going to function.
Building a franchise structure from a single business or concept is not quite as simple as it first appears.
A franchise group is, at heart, a people business. You are creating at least two new businesses from the one you now own – one to service your clients who will be run by your franchisees and one to look after the franchise group and your franchisee business partners, your franchisor business.
The key to creating a good franchise group is to work out your people-based franchise structure first and then, once you understand the nuances, you give the information to the lawyers to put into the best legal structure for the protection of both your franchise partners and you, as a franchisor.
As it’s rubbish in, rubbish out, don’t treat this lightly because any oversight or error in your legal requirements could well lead to expensive mistakes, litigation, heavy fines or even business failure. And believe me, it happens. That is why a franchisee-savvy lawyer will want to come last.
There are seven critical areas you must address first so your lawyer can give you a legal agreement which is relevant to your group:
1. Your franchise structure
What exactly are your franchise partners going to do? Deliver therapeutic massage to your elderly clients? Sell houses and manage the real estate agency that goes along with that task? Do your clients’ bookkeeping?
What are the other tasks which go along with each of those broad areas? What marketing will be needed? Where will the leads come in too? How is the money coming into the group going to be managed?
The list is long. More importantly, so is the list of people characteristics and skills needed to get the jobs done. Inevitably, most franchise groups will find the people most suited to getting the fundamental job done (massage, sales, bookkeeping) will not have the ability to manage all aspects of their business. None of us is good at everything. So, a reference to multiple experts is essential if you’re to start franchising off on the right foot.
Marketing, sourcing leads and managing basic business administration are often areas in which most franchisees need help.
If you want your group to work – you, as a franchisor, are inevitably going to have to take on these tasks. It takes a little working out, and your lawyer is probably not the best person to help with this fundamental first step.
2. The money
Your lawyer is not an accountant.
So many new franchisors expect their lawyer to tell them what their initial franchise fee and ongoing levies should be. These are not fair questions at all!
Sure, you can dig up some averages for different industry sectors, but they mean nothing at all to your business. Because every business has different ways of doing things, different cost structures, different advertising budgets, add to that the cost of the list of tasks you have discovered you will need to take on to help your franchisees become successful in business.
It’s not just your initial franchise fee and the ongoing royalties. You need to determine accurate costs for providing initial training, for the marketing fund, service fee, transfer and renewal fees.
The list is also long, and without help from a franchise savvy accountant and franchise consultant with business experience, you’ll likely miss a lot of critical information.
3. Territories and strategic network planning
Territories are not as simple as postcodes, or population or a handful of other key denominators. It’s a science, and it’s a highly sophisticated exercise with very skilful analysis of specific data information around your franchise outlets.
You might not need to specify a physical territory at all, but rules around whichever way the work is distributed will go into the agreement – and then don’t imagine you can tinker with them afterwards because you’ll find it very difficult to do so.
If you do have physical territories, the impact of initial network planning can be worth millions to you. Territories which are too small, mean franchisees will likely not grow a sustainable business. If they’re too big, you’ll likely not be able to meet customer demand so the business will leave a significant amount of income, profit and value on the table — a wasted opportunity.
A good lawyer respects your researching this area before you brief them.
4. Services and goods
Defining the service you offer may be simple enough, but what about the other needs of your client profile. Jim started with weeding, then lawnmowing, and only years later did he move into the first of his now 40 or so mobile service businesses. He may have struggled to do this if he’d not wisely made adequate provision at the outset.
Many franchisors have their product or are dependent on an outside supplier. Working out the balance can be tricky. Many begin with an outside supplier, then move to white-labelling a product before, in time, manufacturing their own. They often end up making more profit from their product than from the rest of the franchise operation, resulting in a large increase in the value of their business asset.
You need someone to walk you through this discovery process so you can make provision for this kind of evolution in your business. Miss this point and your franchise agreement could hamstring you from having this flexibility. A very costly omission
5. Promotion and lead generation
Generating leads is critical to any business, and your current successful method may get turned on its head when you appoint franchisees. Just think about who you will be recruiting as franchisees and what’s reasonable to expect their skillsets to be.
As a substantial single business, you may have a sales team made up of people who love what they do. Or your phone may suffice for taking sales calls right now. But you know your business backwards and can handle most questions on the fly.
If you are expecting your franchisees to do their selling, you might be setting them up for failure. Sales are probably the most intimidating, most stressful and scary thing for most people, and your bookkeeping or massage therapist franchisees will find this role impossible to do over the long haul. In this digital age, your website is probably the best lead magnet you have so you will be receiving most of the first calls.
There are many things to consider if your franchisees need to operate out of a building, many of them way outside the gambit of your lawyer. There are significant practical and commercial considerations to be explored and resolved first.
If yours is a brick and mortar outlet, do you buy or own the premises, do you lease it, or does your franchisee? Do you fit it out or does the franchisee? Who is responsible for signage?
If it’s a mobile or work from home business model, then vehicles come in to play. Do you provide the vehicle, is it a lease package, what models do they have to be, are they to be branded?
Are there specialist tools and fit-out? Who does this work, and who pays for it? All question to be answered before you consider the legal process.
Then there are all the smaller but less important items to consider.
What types and amount of cover are to be specified? Where is it to be obtained?
Managing the business
You probably do not want an untrained or unqualified person running your franchisee’s business in their absence, or indeed permanently if they decide they want to step back and play investor. How is this to be addressed in the agreement?
The last thing you need is for someone to copy your business and set up in competition. There are many ways this can happen, so closely protecting your Intellectual Property (IP) is a must. Trademarks and a carefully considered corporate structure need the attention of accountants and lawyers skilled in the franchise space and something done sooner than later in your franchise program.
There are many things to consider, and this article touches the tip of the iceberg. It’s unrealistic to place the burden of providing this advice on your franchise lawyer. Which is why it takes a careful and conscientious new franchisor three to 12 months to work through a properly detailed franchisor program with a specialist who can help you step your way around these many often overlapping and confusing obstacles.
Once you have an idea of how your group is going to run, you do need the services of a good, specialised, franchise savvy lawyer who can help to frame up the best franchise agreement to suit your business today and give you the flexibility to adapt, long into the future. The best will want you to have ticked the other boxes first.