What is franchising?
Franchising is when the owner of a company (the ‘Franchisor’) licenses out the right to another person (the ‘Franchisee’) to trade under their company’s name and/or brand. The franchise is effectively a ‘mini package’ of the parent company and is normally marketed in the same way as that company.
What are the main types of franchise arrangement?
There are 3 main types of franchise arrangement. These are:
1. A business format franchise.
This is the type of franchise that business people find the most appealing. A business format franchise involves a franchisee buying into a trade name, taking on a ready-made business model. Often the franchisee purchases its goods from the franchisor and sells them on, or they will offer services under the trade name of the franchisor. This type of franchising can be industrial or commercial. The franchise will usually cost an initial fee with royalties being paid to the franchisor on an agreed regular basis. Franchise may also involve payment of a percentage of the franchisee’s profits to the franchisor.
2. A distribution franchise.
These are commonly found in the retail industry, and occur when the franchisor gives the franchisee a range of products to sell or distribute. The franchisee does this under the trade name and trademarks of the franchisor. As with many distribution agreements, the franchisee is likely to purchase the product on a piecemeal basis depending on what they can sell although normally there will be a minimum order amount specified.
3. A manufacturing franchise.
These are commonly found with food franchises, when the franchisor licenses out the right for the franchisee to manufacture a product under its trade name/trademark. The franchisor’s fee and will often be based on how much product is sold. In this type of franchise, the franchisee is not heavily involved with the marketing of the product and will rely upon the popularity of the product and the reputation of the franchisor.
What different kinds of franchise are there?
Here are some examples of different businesses that have franchises (this is by no means an exhaustive list):
Food & drink outlets
Who is in control of the franchise?
The franchisee runs the franchise as their own business. However, depending on the nature of the franchise, the franchisor will often have control over things such as the marketing, the merchandise, uniforms, sale prices etc.
How are fees charged for a franchise?
A franchisee will normally have to pay an initial fee to buy the franchise. After this, the franchisor will often charge a periodical royalty fee, perhaps calculated on a percentage of the franchisee’s own profits.
Franchisors will sometimes charge additional fees for training and marketing.
What is an ‘operating manual’?
The operating manual is fundamental to a franchise arrangement. It is a collection of documents that tells the franchisee how to run the franchise on a day-to-day basis. It provides the franchisee with any necessary know how and lets them in on any trade secrets. The content of an operating manual will range from the marketing strategy to specifying how the building should be laid out.
It can be quite a long and difficult thing to both write and understand, so whether you are the franchisor or the franchisee, ask your franchising lawyer for advice on the content.
Do I have to disclose confidential information to a potential franchisee?
If the disclosure of confidential or sensitive information is fundamental to selling the franchise, then yes, you should disclose this. However, don’t do so without first entering into a confidentiality agreement with the buyers – an agreement that an experienced franchising solicitor can draft for you. Getting potential franchisees to sign a confidentiality agreement means that you will be protected when disclosing any sensitive or confidential information.
Buying or selling a franchise? Contact our Franchise Solicitors today
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