Worthingtons Solicitors

The growth of franchising

Despite the uncertainty of Brexit and continuing economic pressures, franchising in Northern Ireland continues to expand. Irish fast food chain Four Star Pizza has confirmed plans that it is to open 10 more stores this year, 20 years since it opened its first store on the Beersbridge Road.

The company currently has 14 of its 55 stores in Northern Ireland and has reported an 8% increase in revenue propelled by a 31% rise in online sales. This kind of success creates jobs with 200 new jobs expected with the expansion. Four Star Pizza has a ceiling on capacity as each new store has its own assigned delivery territory as part of its contract.

If you are thinking about buying or selling a franchise it is important you get the right legal advisor to scrutinise the contract in detail. You will need to consider issues relating to property, advertising, intellectual property rights, the regulation of franchising and the application of UK and EU competition law. The contract needs to deal with the scope of the franchise, payment of fees, each party’s obligations, details of products, restrictive covenants and obligations on termination.

As with any new businesses the first step for a prospective franchisor is to prepare a business plan. For the franchisee, entering into a successful franchise can involve a number of pitches, presentations and interviews as competition is fierce. You need to prove your commercial ability to enter into the franchise and be clear on your figures.

Any business owner thinking about setting up a franchise will need to consider whether the proposed products or services are susceptible to franchising, provide a breakdown of the proposed management structure and an explanation of its suitability to franchising. Setting up a pilot operation is advisable to “test run” the business. You can then assess whether it will be successful, how it can be refined, identify the tricky areas and the best management structure, optimise the store layout and equipment, devise selection and training of staff and ensure you can comply with all the relevant regulations and laws.

Property is one of the most important considerations. Many franchises will operate from retail premises and the franchisor will take a headlease of premises and grant a sub-lease to its franchisees. A franchisor should ensure that, on termination of the franchise, the franchisee leaves the premises and any sublease should therefore be for a term that matches the initial term of the franchise agreement. It is also important that the sub lease excludes any provisions relating to the security of tenure provisions.

Franchising is a useful way to ramp up distribution of your products or services without risking additional capital.  It is also a great tool for motivating employees with an opportunity to franchise linked to an individual’s profitability. Some commentators have even suggested that franchise businesses are less susceptible to a recession. However, it is important to remember that franchising involves a loss of control and the restrictions in the franchise agreement need to drafted carefully. The franchisor also has to divest a lot of its knowledge and know how to a third party and although the agreement will contain restrictions on the franchisee’s ability to use this information for its own gain this can be difficulty to enforce. Conversely advantages for the franchisee include gaining specialist knowledge and capitalising on someone else’s name and reputation. Finance can be more readily available for franchisees and the risks of business failure are substantially reduced.

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