When is the right time to start a Franchise Business?
Joel Caws - Technical Director, Select Your Franchise
Like every decision in life, actually deciding to commit yourself to something is actually only half the job. The other part concerns the matter of timing or when you should make the decision itself.
This could seem especially true with a new business venture such as starting up a franchise business. Often there will be sums of money involved and you might have concerns that starting up your new business at the wrong time could cost your dearly. There’s also the issue of family and loved ones that might be dependant on you for income, and you naturally feel a duty to make a wise and timely decision to protect their well being. You might also have personal issues, since nobody wants to feel like they failed at something, but instead be acknowledged for making good and successful decisions.
The good news is that anytime is a good time for starting up a franchise business. In fact, some of the biggest named franchise brands actually started up and flourished during a recessionary time, which you might naturally think is a crazy time to start up a new business venture. The other advantage of a franchise business over a conventional business is the success rate of franchising. Annual franchise surveys carried out in the UK by NatWest and the British Franchise Association, consistently report that around 90% of franchise business owners declared they were trading profitably in any given year. When compared to the success rate of conventional business start-ups (many online sources show only 1 in 5 making it past 5 years of trading) then you can really see why the concept of franchising has become such a success story.
Once you have decided that you want to start up a business, whether it be a franchise or conventional self-employment, the best advice is to make a point in the future when you decide to make the leap and then stick to it. It’s easy to put things off and decide instead to carry on with what you have because its comfortable and feels less risky but in fact nobody ever made any progress in life without an element of risk. The good news is that opting for a franchise business helps to reduce some elements of that risk and give you the best possible chance of success. However, you will need to commit yourself to it, decide to work hard and make the business work for you.
A chink in the armour of the Franchisor?
Geoffrey Sturgess - Partner, Blake Lapthorn Solicitors
Franchising is largely a non-regulated activity in the UK and new franchisees are not protected by consumer law. As a result, UK franchisors armed with ‘standard’ franchise contracts including single agreement and no reliance clauses have hitherto enjoyed an almost ‘untouchable’ status.
Unsettling for franchisors is the glimmer of hope offered to franchisees in Mr Justice Penry-Davey’s recent decision in the High Court in MGB Printing and Design Ltd v Kall Kwik UK Ltd [2010] EWHC 624.
Although it may be appealed the decision is significant to the industry.
The case concerns Mr Bibby, sole shareholder and franchise principal in MGB, who was advised by Kall Kwik’s head of franchise sales on the likely costs of purchasing an existing franchise and refurbishing the premises to meet Kall Kwik’s contractual standards. Kall Kwik effected an introduction to the existing franchisee and advised Mr Bibby that the refurbishment costs were likely to be £15,000. This sum was included in Kall Kwik’s cash-flow document provided to Mr Bibby, who relied on the estimate in his calculation of the purchase price for the franchise of £160,000.
Kall Kwik had no recent knowledge of the premises having not inspected them during the term of the existing franchise agreement.
Mr Bibby then set up MGB, which entered into a franchise agreement and subsequently a marketing launch agreement with Kall Kwik. Both parties entered into a sale and purchase agreement with the existing franchisee. It later became apparent to MGB that the cost of refurbishing the premises to Kall Kwik’s contractual standards far exceeded the estimation given, being actually in the region of £30,000 to £45,000. Furthermore, Kall Kwik failed to provide marketing materials and training under the terms of the marketing launch agreement.
Michelle Stevens Hoare (instructed by Owen White), acting for MGB, sought damages for the loss suffered by paying too high a purchase price to the existing franchisee and the negligent advice given and breach of contract in relation to the franchise and marketing agreements.
Graham Cunningham (instructed by Hamilton Pratt), acting for Kall Kwik, denied that a duty of care was owed to MGB as the advice given and the cash-flow document were provided to Mr Bibby prior to the incorporation of MGB so could not have given to MGB. Naturally, Kall Kwik also denied negligence and breach of contract.
Kall Kwik’s arguments included reliance on a boilerplate ‘entire agreement’ clause – “don’t rely on anything we tell you before you sign the franchise unless it’s actually written into the franchise agreement itself” which is found in most UK franchise agreements.
Mr Justice Penry-Davey held that Kall Kwik had given negligent advice and had breached the duty of care owed to MGB. Further he held that Kall Kwik had breached the terms of the franchise agreement and marketing launch agreement in failing to provide marketing advice and materials.
Kall Kwik knew of Mr Bibby’s intention to incorporate and run his business through a company throughout the pre-contract negotiations and that his company (MGB) would benefit from the advice given by Kall Kwik to Mr Bibby. Therefore, the later date of incorporation of MGB did not preclude Kall Kwik having a duty of care to the then non-existent company. Mr Justice Penry-Davey held that MGB’s damage was reasonably foreseeable and it was “fair, just and reasonable” for the duty to be owed. Specifically, Kall Kwik breached its duty of care to MGB by providing the £15,000 estimation without making reference to the contractual standards required in its own contract or any physical inspection of the existing franchisee’s premises.
The courts seem to be becoming concerned at the ability of franchisors to avoid almost any liability to new franchisees by using tough and non-negotiable contract terms and we have seen several attempts to redress this balance over the last few years.
The decision makes clear that franchisors should ensure that advice and guidance given to potential franchisees is up-to-date and given with reasonable skill and care whether given verbally or in writing. That should not be of concern to any ethical franchisor. No doubt however we will soon see additional wording in franchise contracts intended to ensure that exclusion clauses cover potential liability arising for negligence prior to the signing of a contract as well as any liability arising during the term of the agreement.
Dissatisfied existing franchisees could now start looking for evidence of pre-contractual negligence. Even with such evidence, however, most franchisees are still likely to conclude that the costs and risks of an action against their franchisor are just not worth it.
Contact:
For more information please contact Geoffrey Sturgess, a partner and head of the Franchising team at Blake Lapthorn on 01865 253 284 or at geoffrey.sturgess@bllaw.co.uk.
Advice on choosing a Business Franchise Opportunity
Nick Strong, MD - Select Your Franchise
A Business Franchise is a generic term which can cover most franchise business opportunities. The word ‘Franchise’ can be applied to pretty much anything that involves a license to use a brand or an idea. This is why it is often used in the film industry to describe a series of films that are produced along a common theme.
In the same way, this license to use a brand or idea can be used in business and is often referred to as “business format franchising”. A company who has come up with a good business idea and formula which proves itself to be successful, can effectively license out the right to use it to other individuals who would like to start up in business.
Part of the reason that business franchising has been so successful for brands like McDonalds and Subway, are the potential to expand in this controlled way also increases their brand awareness as their network grows. People become used to seeing the branded franchised outlets and the proven system ensures customers should always get the same service and quality regardless of the outlet they visit.
Even with lesser known brands, the power of having a larger network behind you gives potential customers confidence that they are not dealing with a ‘one man band’.
To start your search for the most suitable business franchise, one of the best ways is by browsing online business franchise directories. These will provide you with a good range of option with helpful tools that will help to narrow down your options by affordability, location and industry type.
You may also want to look at some franchise publications or visit a franchise exhibition in order to get a feel for franchising and to get an opportunity to see whats out there.
Once you have a short list of options to consider, you can make contact with the franchisors you have chosen and visit their head offices. This is a good way to meet them face to face and ask any questions you might have about their particular franchise opportunity.
It’s important to consider franchising as a long term investment so its important to obtain a list of references from each franchisor. These will commonly be franchisees who are already running their own franchise businesses and can give you helpful advice and opinions on their experiences.
Consulting industry professionals is also invaluable such as those approved by the British Franchise Association. Franchise Consultants can help you through the minefield of choosing a franchise, while a franchise lawyer can assist you with the legalities of taking on a franchise business.
Also make time to consult one of the franchise sections of the major high street banks. They can advise on the amount of finance they might be able to offer you. This may of course help in your choice of franchise business since you may well be able to afford more than you might think initially.
