What are the risks of franchising?

I run a car tyre business and I have three units up and running. All are profitable, but the start-up and ongoing staff costs mean that I don’t want to personally commit to setting up any more. Therefore, I thought that franchising would be a good way to expand. However, I am concerned that I might not have all the safeguards in place to ensure that I make a good return on licensing out my secrets.


A. James Knight writes:

Franchising should allow you to expand, while your franchisees shoulder a major part of the responsibility. Usually, a new franchisee will look after leasing the new premises, taking on staff and paying most of the start-up costs. They’ll also usually pay an initial fee, plus a percentage of takings.

It’s vital to ensure a uniform and high standard of goods and services across all outlets, so you’ll need to put a lot of effort into producing a comprehensive operations manual. This sets out in great detail how the business should be run, the processes to follow and the standards required. As it contains valuable information, it should only be distributed to potential franchisees who have signed a non-disclosure agreement. The manual should describe the nuts and bolts of your operation and requires major input from those who know your business intimately.  

Each franchisee must also sign a ‘franchise agreement’, detailing the contractual terms between you and them, plus the conditions on which you are licensing your brand name. You will need to ensure you can protect your brand’s reputation if the relationship is not working. It is your responsibility to appoint solicitors to prepare this contract, and tailor it to your business.

A well-thought out spread of new franchises can help you expand into previously unconsidered regions, tapping into the valuable ‘grass roots’ knowledge and enthusiasm of the local franchisee. Franchising should never be seen as a soft expansion option. It takes careful planning, control and not insignificant set-up costs to ensure that the existing business is safeguarded.

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