With big name companies such as Wolford, Strip, Baci Lingerie, boux avenue and Agent Provocateur among those in the sector seeking to expand via Franchising, next year, could you be missing out on a trick? Shaw Stapely, associate at law firm Thomas Eggar, explains the key points that need to be considered when exploring the franchise concept.
With retailers being hit ever harder by the lack of public spending, they are looking to find ways to reduce their bottom line — one way is through franchising their brand. Chocolate retailer Thorntons, for example, announced this year that it would be closing many of its company-owned stores, however it hopes to replace these with franchised stores in an effort to reduce company overheads and protect jobs.
Franchising can be a very effective way of growing a successful business. Instead of setting up and running new outlets itself, the company finds independent franchisees that it helps to set up their own businesses, using the company’s existing business as a blueprint for expansion.
The franchisees finance and manage their businesses themselves but pay the company fees for the right to use its business model, brand and for ongoing advice and support. This allows the company to grow faster and give a better return on capital than if it owned all the outlets itself. Some of the best known companies in the country have become household names through franchising, including McDonalds, Domino’s Pizza, Molly Maid, Dyno-Rod, Thorntons and Costa Coffee.
Franchising does not suit every business, however, and a franchised business needs to be profitable enough to make money for both the franchisee and the franchisor company. Further, the company business needs to be one that can be replicated in different locations by its franchisees. Businesses that need high skills levels or professional qualifications can be more difficult, but not impossible, to franchise. The company also needs to makes it worth the franchisees’ while paying it, instead of simply setting up their business independently. Usually this is a recognised brand name, providing equipment or supplies, or providing training and marketing support.
Breaking out the benefits
The benefits of franchising include using the franchisee’s capital to develop a brand at a local rather than national level. The customer then receives a better and more localised service. Growing a business can be difficult and expensive, requiring further capital to finance new outlets. Management also becomes more difficult, particularly if the business is widely spread geographically.
Franchising can enable a single site company to establish a national presence relatively quickly, achieving a rate of network growth that would be otherwise unattainable. Far fewer resources are required to help open a franchised outlet than a company-owned store, as the franchisee funds the premises and fit-out, recruits and trains the staff, and implements the local marketing campaign.
Each franchise store will be under the ownership of an individual with specialist local market knowledge who is in essence their own boss. Their earnings depend upon the success of their store, as opposed to a salaried manager whose earnings are largely unrelated to performance.
Whilst franchisees will pay an initial investment to purchase a franchise, which will cover the costs of recruitment, training and launch, the main financial incentive will be the ongoing management service fee. This is a percentage of the franchisee’s turnover, paid to cover the costs of ongoing support, product research and development, national marketing campaigns, plus to provide a fair reward for the use of intellectual property and ongoing efforts. Because there is less capital employed, the company’s profits are generated on a much lower capital investment.
By franchising, a company cuts overheads, reduces staffing and administration issues and can consequently focus more time on developing the business. Accelerated expansion of the business network achieves higher economies of scale earlier, stronger brand awareness, greater bargaining power with suppliers and can enable a company to gain an early lead on competitors and establish a dominant position in its market.
Understanding the legal implications
Franchising can have its drawbacks. In addition to developing and marketing the franchise, a franchisor must ensure that it gets the right franchisees and controls what they do to avoid any reputational or brand damage.
It is important to put in place relevant protections to prevent the franchisor’s intellectual property being infringed — for example, by registering trademarks and the company name. Once adequate protections are in place, the company can benefit from licensing its intellectual property, plus it is easier to protect intellectual property and prevent infringement if it is registered and ownership can be proven.
When franchising a business, the franchisor will enter into a legal agreement with the franchisee. A clear, written contract is essential. This franchise agreement will set out what rights and obligations each party has, covering key areas such as: the franchisee’s permitted territory and their rights within it; their rights to use the franchisor’s intellectual property; the restrictions on their activities, both during and after the term of the agreement; the fees they will pay; the support they will receive, both initially and during the term; and what happens if either party wants to bring the agreement to an end or sell the business.
If retailers like Strip, Baci Lingerie, Wolford and Agent Provocateur can find store operators who are prepared to invest the time and capital to become franchisees, such investments will of course also bolster their bottom line, in addition to maintaining high street presence and customer goodwill.