Finding Your Business Path Through Franchising.
What do big brands like McDonalds, KFC, Marriott International, InterContinental Hotels & Resorts, Century21, RE/MAX LLC, Deloitte, Dunkin Donuts, 7 Eleven, Ace Hardware, Jazzercise Inc., Planet Fitness, Rent-A-Center, and Zara all have in common? They are all business which franchise their name and brand globally!
With the world set to enter into another recession (which may possibly become a depression worse than that of 2009), businesses are looking to keep afloat. Whilst big businesses are looking to maintain their longevity, it’s the small businesses that are more likely to suffer. One way to go into business without having to begin from scratch is to consider becoming a “franchisee”- i.e. to obtain a franchise from an already existing and successful business. Franchisees essentially manage a business from the “franchisor” (i.e. the name-brand business).
Although the concept is simple, there is a lot to consider in its execution (which is why an experienced lawyer and accountant should always be consulted before signing any franchise agreement).
Franchise agreements are typically very strict and outline how the franchisee should run almost every aspect of the business to ensure that the business maintains its high standards and good name.
Navigating the Franchise Agreement
Firstly, there are fees that are built into the contract. They often include:
(1) Franchise fee:
This fee is paid only one time and it is paid at signing the franchise agreement. It is strictly paid for the right to use the name of the business. The amount of the fee often depends on the size and success of the name-brand you are franchising. The more well-known and successful the name-brand, the higher the fee.
(2) Royalty Fee:
Like the franchise fee, the amount of the royalty fee depends on the success of the name-brand. Unlike the franchise fee, the royalty fee is can be paid on a weekly, monthly or yearly basis- it depends on what the parties agree upon prior to signing the contract. Royalties are a pre-agreed percentage of the income of the store. Typically, royalty fees range from 4%-12% (but this depends on what the parties stipulate).
(3) Advertising Fee:
Advertising fees are less than royalty fees. The amount depends on the success and popularity of the name-brand. Typically, the amount is paid to the franchisor and the franchisor uses this for advertising the brand. This fee can be deducted on a monthly basis from the store’s revenue.
Aside from the fees, the franchisor generally puts caveats in the contract which allow the franchisor to control how the business is run- including the location of the business, recruiting and training of staff, how to maintain any required equipment, staff uniforms, how to answer telephones, any renovations, etc. This is required in order to ensure that all stores bearing the brand-name are the same from customer service to quality control of the product or service being offered. Some franchise agreements also require the franchisee to maintain a minimum monthly or yearly revenue in order to be able to keep the franchise, otherwise the franchisor may include a clause in the contract that allows him to rescind the license for the franchise.
Legal Considerations of a Franchise Agreement
As you can see from the above, there are many factors that go into negotiating a franchise agreement. Most importantly, a potential franchisee should also be aware of the business law of the location in which the prospective franchise will be established. This includes knowing the extent and any limitations of employment law, tax legislation, and corporate laws which may have an affect on how the business is run at a particular geographic location (especially if it is a global franchise). The last thing any franchisee wants is to sign an agreement that requires the franchisee to perform something which may not be legal under the laws of the country in which the franchise is being
Another important legal consideration for a franchise agreement is the dispute resolution clause which will govern how a potential dispute is settled- under which laws, through a court or tribunal, will the franchisee or the franchisor have to pay for such litigation and if the franchisee has to pay the cost of settlement will they be indemnified.
If you have any questions about obtaining a franchise, or if you are a business that would like to franchise your brand’s identity, please contact our experienced international corporate lawyers us at email@example.com