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Majestic Wine to McDonald’s: Brands want in on franchising

Majestic Wine is rolling out a 'franchise-lite' model; time to follow its lead? "Franchising can mean rapid expansion without significant capital"...

Majestic Wine’s announcement that it plans to roll out a franchise-lite model is the latest variation on franchising, a popular option for UK businesses looking to grow.

From Driver Hire and ActionCoach to McDonald's and Costa, brands big and small want in on franchising and have used the model to spur on growth – and to support budding entrepreneurs in making their dreams of starting a business a reality.

The franchise industry is operating at record levels with 2016 research from the bfa indicating overall turnover of more than £15bn, over 44,000 businesses and in excess of 621,000 jobs.

So, why is franchising becoming a sector of prosperity?

Majestic Wine's move to franchising

Majestic Wine's ‘franchise-lite' model will see the managers of each Majestic Wine branch given the chance to become partners in the business, giving them greater control over the day-to-day running of stores.

They will also get a bigger slice of the contribution of their store instead of earning a bonus from a percentage of sales.

Whether you’re looking to follow Majestic’s lead and adopt a franchise-lite model or go down a more standard route, done properly the launch of a franchise can mean rapid expansion without the need to raise significant amounts of capital.

Why franchise?

For franchisees

For a potential franchisee, opening a franchise will be a less risky route than building a business from scratch. The business you join will already have brand awareness and a proven track record of success in the market place.

As with any new business venture there are risks and rewards involved but there is encouraging research to suggest that franchise businesses benefit from a lower failure rate than new businesses.

However, there is still a great deal to think about in terms of a legal framework.

See more: The pros and cons of becoming a franchisee

Franchisees should conduct extensive research to find out as much as possible about the franchisor and the sector they will be working in, especially any issues that might affect that sector. Once the franchise business is up and running, you will need to make sure your franchisor follows the wording of the franchise agreement and operations manual.

For franchisors

If you're already running a business or are starting a business and want to make it a franchise, you will become a ‘franchisor'.

As a franchisor, you will have to set up a framework providing training and assistance to the new franchisee, while retaining a significant amount of control over the business (less control on the part of the franchisor is what would distinguish a ‘lite’ model).

For a franchisor there are a number of factors to consider, importantly:

  • Ability to franchise
  • Consistency
  • Brand protection
  • Control

Franchising a business involves granting a licence to a third party (the franchisee). A franchise agreement should set out the controls by which the franchisor will seek to protect its business model.

A well drafted agreement should, at the very least, cover the points outlined above. You will also need to ensure you have a strong brand and business model already in place to enable the franchisee to run the business without needing too much input.

One of the most important considerations is brand protection. Your franchise will effectively be seen as an extension of your original business as the franchise represents the brand being invested in.

To this end, intellectual property (IP) is paramount and must be identified and properly protected before the franchising process begins. Your franchise agreement must clearly outline the rights and permissions available to the franchisee and this should extend to what happens when the franchise ends.

As franchisor, you should ensure that no-one other than the parties in the franchise agreement can use your IP.

The second key document for franchisors is the operations manual, which reinforces the terms of the franchising agreement by setting out how the relationship will work operationally.

At bare minimum, a franchise agreement should comprise of the following:

  • A summary of the existing network with an outline of the business philosophy
  • A description of the system involved
  • Operating methods and stock requirements
  • Information relating to payment of franchise fees, financial reporting, general accounting and staff issues
  • Outlet i.e. the store, layout, display and merchandising
  • Legal and ethical issues e.g. the relevant legislation to be adhered to and the franchisor’s policies such as anti-bribery
  • The franchisor’s directory e.g. information regarding the employees and job descriptions and important contact details

With the correct paperwork and controls set in place, a franchise can be rewarding.

As long as each party understands the risks and rewards of starting the relationship and what is expected of each of them, franchising can prove to be a profitable venture for both franchisor and franchisee.

This article was provided by Vanessa Crawley, solicitor in the corporate team at SA Law.