Franchises are a big, though perhaps sometimes overlooked, type of start-up business. However, whether you are the franchisee, or a small company looking to scale as a franchisor, there are important considerations to keep in mind when starting up a franchise.
First, both parties will obviously want to check the financial health of the other. Obviously the franchisor will want to ensure that the franchisee has the financial means to support the franchise. However, the franchisee may also want to ensure that the franchisor also isn’t in any financial trouble; no matter what the nature of the relationship — whether the franchisor maintains strict controls or merely licenses the company trademarks to the franchisee — it does a franchisee no good if the franchisor goes out of business!
However, the main focus of the process will be on the franchise agreement. Again, the nature of the relationship is important — will the franchisor, through the agreement, maintain control over the operations of the franchise, even down to the type of napkin used or the number of pickles that must be put on each sandwich? Or will the franchisee be essentially allowed to run their own independent business, merely licensing trademarks from the franchisor? The latter obviously grants the franchisee the opportunity to actually run a business, but for the franchisor it also opens up the risk of dilution of the brand due to a poorly-run franchise. In addition, franchisees may want to check the agreement for any additional costs, such as having to buy supplies directly from the franchisor or a franchisor’s supplier, which can have a direct impact the franchisee’s costs.
Even the most simple of franchise relationships can have complicated agreements — it is critical for both parties to engage their own legal counsel to help the parties understand the parts of the agreement and look out for each party’s interests.
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