Franchising – what is it? My Guest Blogger Nick Marshall, Pinel Advocates

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franhiseSandpiper CI is a Channel Islands retailer which, so far, has brought 11 high street brands to the Channel Islands including Marks & Spencer, Iceland and Jack Wills as well as running its own operations.

According to the British Franchise Association the elements of franchising in its modern guise can be attributed to Isaac Singer, the inventor of the eponymous sewing machine who, after the US Civil War in the 1860s began to license out servicing and repairs to local merchants around the country, who were later permitted to become regional salesmen for his machines.

The vast majority of franchises do not necessarily involve high profile names and cover a multitude of activities, such as business coaching, commercial cleaning and greeting cards. Indeed, Claire Boscq-Scott – The Busy Queen Bee – has recently granted in Guernsey a franchise of her Jersey customer service business, and she is looking to grant franchises internationally.

The most common form of franchising is where a franchisor (A) grants a franchisee (B) a licence to distribute A’s products or services, using A’s business method and technology and under A’s trade marks. A supervises that use, and provides training and other assistance (eg publicity) to B to help B in running the franchise. A franchise is thus a licence to use a business method for a period, subject to a royalty and other fees.

From a franchisor’s viewpoint, franchising:

• allows growth with lower capital expenditure than other means (eg direct sales operations);
• requires close control and supervision of franchisees; and
• requires the franchisor to own the trade name/marks and business method.

From the franchisee’s viewpoint:

• as the concept is proven, the risk of failure is usually lower, and the initial investment less, than with a stand-alone business;
• the franchisor provides training, advertising and other support;
• the franchisee meets operational expenditure and (usually) has product risk; however,
• he does not own goodwill in the business, and the franchisor is not usually obliged to renew the agreement on expiry – so sunken costs must be covered; and
• initial and ongoing fees are payable, and the franchisor exercises close operational control.

Whether you are a business looking to grant a franchise or someone interested in taking a on a franchised business it is vital to have two key documents: a franchise agreement and an operations manual. The franchise agreement will cover such areas as:

• whether the franchise to be exclusive or not;
• the territory i.e the geographical area for which the franchise is to be granted;
• the term i.e. for how long is the right to operate the franchise to be given;
• the sales targets;
• what trade marks and other intellectual property rights are to be licensed.

The franchise (or operations) manual contains the know-how needed to run the franchise, and sets out relevant performance standards. It covers such matters as:

• staff qualification and employment matters;
• customer service standards and complaints procedures;
• pricing;
• premises layout;
• advertising and marketing; and
• accounting.

A franchisor may also want to expand its network overseas to exploit new territories and develop new markets. Similarly, a prospective franchisee may want to bring an overseas business to its locale. An international franchise agreement can, however, also present additional challenges such as language and cultural differences, protection of the brand and other intellectual property rights and local laws generally.

 

By Nick Marshall, Senior Associate, Pinel Advocates, Jersey.

 

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