Franchising and what it has to offer

June 2023

For many entrepreneurs going it alone and building a new business is an exciting prospect. However, it is also fraught with risk. The prospect of building a brand and reputation from scratch, with few or no customers, can be a challenge, and the costs associated with setting up, running, and maintaining a business until it can support itself while also covering day-to-day personal living expenses can be a worry.

An alternative to stepping into the unknown is an idea that, while operating successfully for many years, has become increasingly attractive of late: the franchise model. In this article we will explore franchising and what it has to offer.

What is a franchise?

At its core, a franchise is a contractual business relationship between two parties: franchisor and franchisee. For a business owner wanting to grow organically, offering access to a proven brand and product to other entrepreneurs is a cost effective way of growing a business both in scale and geographical reach. In doing so, the business
becomes a franchisor.

For an entrepreneur wishing to work independently and build a business, investing in a franchise offers a proven method of entry to a market or industry, allowing a quick start-up with the backing, support, and visibility of an established brand.

The terms and conditions that underpin this contractual arrangement are set out in a franchise agreement.

The franchise agreement

It is important to be clear that in any franchise scenario overall control of the business and how it operates and markets itself always rests with the franchisor; the franchisee merely holds a licence to operate under a brand umbrella for an agreed duration. Consequently, the franchise agreement needs to protect both parties but given the risk of brand and reputational damage that one rogue franchisee can potentially cause, the franchise agreement will necessarily lean quite heavily towards a franchisee’s obligations to a franchisor who will expect the highest standards of business conduct.

Equally, a franchisee is entitled to expect certain standards of service and support from a franchisor. Thus, the franchise agreement will set out the obligations incumbent on both parties, covering areas such as:

• how the franchisee will operate the franchise
• any geographical restrictions on operation
• the duration of the agreement and any options to extend or renew
• initial franchise fee – a one-off cost of entry
• royalties and ongoing fees – usually a percentage of franchise turnover
• use of intellectual property such as trademarks and logos
• support available from the franchisor such as marketing, technical, and business development.

Investing in a franchise – advantages and disadvantages

Ostensibly, there are many advantages to investing in a franchise. An entrepreneur can start with a ready-made and proven business model trading under a recognised and successful brand that automatically attracts customers. Add to this the benefits derived from the franchisor’s marketing and advertising activities, together with training and development, and technical support, and it begins to look like the franchisee has several advantages over the independent business owner trying to build a business. However, these benefits come with a cost.

Investing in a franchise is not cheap. To gain quick entry to a market or industry by riding on the back of an already successful business means paying for the privilege. This appears most obviously as the licence to trade under an established brand but, depending on the type of business, may also extend to expensive fitted premises and equipment. McDonald’s is an obvious example.

Most tellingly perhaps, owning a franchise is not quite the same as owning a business. To protect its brand, a franchisor will lay down strict requirements to ensure consistency of product and service, and brand protection. In signing up to these requirements, a franchisee inevitably sacrifices the control and flexibility that an independent business owner enjoys. Some may view this as an advantage as it removes much of the day-to-day business risks; others may see it as too restrictive.

Investing in a franchise – do your homework

The success or otherwise of a franchise opportunity relies largely on each party fulfilling its obligations. It is this rigid legal structure that reassures many potential franchisees. Therefore, it is vital that you enter and invest in a franchise opportunity with your eyes open; do your homework and find out as much as you can.

However, you are not completely in the dark as it is incumbent on a franchisor to provide information to enable potential franchisees to make informed decisions before entering into any contractual arrangement. This takes the form of a pre-contract that provides information on:

• the franchisor
• the franchise business and network
• market data
• past business results
• the clauses that will appear in the contract.

Armed with this knowledge a potential franchisee is in a much better position to decide.

For many entrepreneurs looking to set up in business, the franchise model offers many attractions. However, there are significant costs involved that need careful consideration alongside the potential benefits. Before committing to investing in a franchise, it is sensible to seek independent advice from experts in the field of franchising.

About the author

Anne-Hélène Mathieu
Lyon, France

Anne-Hélène is a partner at Russell Bedford’s Lyon member, Pyramide Conseils. She has more than fifteen years of experience, including several years in large audit firms, small and medium sized firms and creating her own practice.

Throughout her professional career, Anne-Hélène has developed varied knowledge making her a real expert today. She is skilled at addressing the different challenges experienced by companies and entrepreneurs, by personally advising her clients.

She offers added value through her cross-disciplinary skills in the fields of public accounting, commercial law and international business, which allow her to offer a diversified range of services.

She is passionate about enriching her knowledge through experience and supporting her clients in taking their businesses forward.

a.mathieu@pyramide-conseils.fr