Franchising and Licensing
Have you ever thought about setting up a franchise? In today’s show we go through the important aspects of what goes into a franchise and compare it to a licence agreement.
In Show 031 – Franchising and Licensing originally broadcast on Facebook Live on Wednesday 8 November 2017 we explore this interesting topic.
All this month we are going to discuss Phase 7 of the Business Legal Lifecycle. Expansion, Franchising and Licensing are the decisions that you have to make as your business grows. Today, we want to focus on how to franchise your business and to license your intellectual property.
The whole point of a franchise is selling your systems and branding to another person to operate. A franchise agreement will cover all the details about what you are providing to the franchiser. A key part of the decision about whether or not you want to franchise is time management. Operating a franchise is an entirely separate business from the one you are currently operating. Do you have the time to do that? If you don’t both you current business and your franchise will suffer.
In Australia there is something called the Franchise Code of Conduct. This legislation regulates things like what needs to be disclosed and the expectations of the ongoing relationship. The whole point of the code is to ensure that everyone acts in good faith. The franchiser has to give a disclosure statement before the signing of the agreement. It’s very tempting to fill out the disclosure agreement yourself. That’s very dangerous. Mistakes can lead to legal headaches in the future. If you haven’t provided the right information you could end up in years of litigation. Among the things you are required to disclose include revealing all current and previous franchisees that have been in business with you. You also have to be clear about all payments that will be required of the franchisee. There are standard fees that are outlined in the Franchise Code of Conduct. Another common element of a franchise agreement is the marketing fund. All franchise members can pay into the fund in order to purchase advertising and other marketing services. You also need to be clear about what is going to happen at the end of the franchise agreement. The final thing you need to disclose is all your financial information. You have to provide access to your books so that that the franchisee knows how much the business is making.
Choosing the right franchisee is a critical decision. You don’t want to allow someone access to you business model who is going to foul up your brand. You have to make sure the person you are entering into an agreement with has a good reputation and a solid track record in business. We had a client recently who set up a franchise system in the coffee business. He brought in anyone that wanted to buy the franchise license. The problem was that he wasn’t training and selecting the right people. He eventually amassed something like 50 franchises. Unfortunately he was having massive problems with a number of the franchisees. We had to go through a long process of revamping his franchise process. Once that was done he stopped having all those problems.
Another important part of setting up a franchise is the manual. It’s the instructions for the franchisee about how the business should run. All the details of the business need to be included in the manual. Putting those down on paper is good for the business whether or not you plan on franchising the business. It’s not an easy task and you will need advice along the way. There are services that will write a manual for you but we recommend against that. You know how to run your business – they don’t.
There are significant differences between a license agreement and a franchise agreement. A license agreement is much cheaper to setup. It essentially allows someone else to use your intellectual property. The problem is that you have very little control over the business once it’s licensed. You can’t dictate how they use the brand. It’s very tempting because of the lower cost upfront. But it can end up costing you much more in the long run.
More about this Show
We started Business Legal Lifecycle to create a simple way for you to understand complex legal terms. Most importantly we want to help you to develop a plan to take your business successfully into the future. There’s a startling statistic the underscores the importance of developing a solid plan. The majority of business owners are just seven months away from losing everything. A single aspect of your business that is not set-up correctly can shut down your whole operation very quickly. Legal advice is not cheap and even when you can afford it there is often a divide between lawyers and their clients. We want to close that gap once and for all. We want to put legal knowledge and tools into your hand to prevent the worst from happening to you.
Twice a week we are going to deliver those tools right to your home or office with Business Legal Lifecycle TV. We’ll start the week with Fast Fix Monday, a short 5-10 minute video that will tackle a single issue that businesses have to deal with. Then on Wednesday’s our main show will feature with more fulsome discussions and interviews all delivered in a straightforward and easy to understand format.