Taking a franchise may be the best thing you ever do.

But on the other hand it could be the worst. And the trouble is that you probably won’t know which it is to be until after you have started to trade by which time it is likely to be too late.

Clearly some people do very well out of franchising. I heard four success stories at the “Franchisee Panel” organised by whichfranchise.com at the National Franchise Exhibition in Birmingham on 1 October 2011. The speakers were three young men (and one not so young man) from four different franchises who spoke with almost religious fervour about their businesses:

They were all impressive – particularly Steve Tarpey who spent a long time looking for work after losing his job as sales director for a global company before moving into agency nursing and home care – and it was good to hear them. There are not too many successes in today’s economy and I wish them all the best of luck.

Touring the National Exhibition Centre yesterday it was hard to remember that there was a recession – sorry depression (on some measures the worst in the UK since the 1870s). Stand after stand promised a trouble free road to riches beyond the dreams of Croesus. My favourites were Felicity Hats a hat hire agency with the most delicious hats on its stand, The Cherry Tree offering equally tempting jams and chutneys, and somewhat less girly, Plug + Play Design of Godalming which fired off an email to me with information about their offering within minutes of my visiting their stand.

At one level this positivity is not misplaced. The retail banks seem to like franchising – partly because business format franchises are much more likely to succeed than other start-ups but also because they usually have plenty of collateral. Notwithstanding Vickers, Basel, Lehman Brothers and Greece the banks still seem to have loads of money to offer to franchisees even now. The first speaker of the day was Richard Holden, the head of franchising at Lloyds Banking Group, who gave some very good advice to anyone contemplating franchising including 30 key questions for intending franchisees to ask of prospective franchisors which I strongly recommend. Similar advice was available on the stands of the Royal Bank of Scotland and HSBC.

Having said all that I have seen what can go wrong with franchising. In the days before the “Access to Justice Act 1999” I got a lot of work from legally aided franchisees who were facing the loss of their homes or even bankruptcy because they had taken franchises that had not worked out for them. Usually there was only so much one could do for them because they were bound by agreements that the franchising expert John Pratt described yesterday with disarming candour as “the most one-sided agreement you are ever likely to see”. In the early days of my career I was able to blow apart many of those agreements citing Pronuptia de Paris GmbH v Schillgalis [1985] ECR 353 to bemused Queen Bench masters and district registrars (or district judges as we now call them) around the land because very few franchisors had notified their schemes to the Commission but then it became very much harder after the Commission adopted the franchising block exemption (Regulation 4087/88 of 30 Nov 1988). After that loophole was plugged it was occasionally possible to find other holes to poke in franchise agreements relying on the Unfair Contract Terms Act 1977 or rules of equity or common law but that required resources. After paragraph 1 (h) of Schedule 2 to the Orwellianly named Access to Justice Act 1999 removed business disputes from the scope of legal aid the only way distressed franchisees could be saved was by taking their cases pro bono or for grossly reduced fees which I occasionally did and, indeed, when the justice of the case so requires, continue to do.

“Go to bankers and solicitors who understand franchising” and “Make sure your franchisor or advisor is a member or affiliate of the British Franchise Association” were recurring themes throughout the conference and that is common sense. There was a lot of good advice on offer from solicitors like John Pratt whose “Franchisor’s Handbook” is almost as readable as a novel. The BFA does good work to set and uphold standards and offers mediation and arbitration schemes to resolve franchising disputes less expensively than litigation. But I am not sure that that is enough. One obvious difficulty is that all the great and the good in franchising seem to act for both sides and it is very difficult to run with the hares and hunt with the hounds. And it is all very cosy with body A recommending advisor B and vice versa though to a certain extent that is inevitable since franchising is a niche activity that requires specialization. What is really needed is a sort of trade union for franchisees or at least a franchisees’ advocacy group and that, of course, is probably never going to happen for all sorts of reasons.

So what advice can be given to prospective franchisees? The first thing I would say is be very, very careful and very, very sceptical. If a deal seems too good to be true then it probably is. The second is to plan for the possibility of failure as best you can. Failure can occur for all sorts of reasons and it may not necessarily be your fault. Attend all the seminars, read all the bumf, take all the advice on offer from the BFA, the banks and their recommended law firms and other professional advisors but plan an exit strategy in case everything goes pear shaped. It will probably cost you a lot of money in legal fees if you ever get into a dispute and even more if you want to buy yourself out of your franchise or start another business. If you have that kind of cash then there is no problem. If not, then think about taking out legal indemnity or other insurance. Just as a prenuptial agreement is very hard to contemplate when choosing your wedding dress so an exit strategy is hard to think about when £ signs are flashing in your eyes but just as couples fall out of love so franchisees and indeed franchisors can fail.

If you want to discuss any of the issues in this article or franchising in general call me on 080 862 0055 or get in touch through my contact form.

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About Jane Lambert

I am a barrister specializing in intellectual property, technology, media and entertainment and competition law. I specialize in helping SME (small and medium enterprises) protect and exploit their investment in brands, design, technology and the arts. SME require intellectual property (legal protection for their intellectual assets) at least as much as big business but their limited means restrict the way they can use it. Looking after such clients wisely requires skills and knowledge which have taken me years to learn.
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8 Responses to Taking a franchise may be the best thing you ever do.

  1. David Eadie says:

    As usual Jane, your advice is first class. A relative of mine recently signed a franchise agreement which my wife (who is a solicitor) and I thought was very much loaded in the Franchisor’s favour. We both recommended he should pay for a specialist lawyer to advise him – but the quoted sum of £1k put him off. He did get a specialist lawyer (possibly one recommended by the Franchisor!) and got the agreement “tweaked” back into his favour.

    The point to me, is that, this “tweaking” clearly suggested that the Franchisor had deliberately framed the agreement to exploit unsuspecting people into signing a very restrictive agreement, which may turn out to be onerous as well.. There is therefore clearly an element of trust that IMHO is missing and one has to wonder why?

    Interestingly, I also considered a franchise – but in another service industry. My enquiry was met with a very “bolshie” email. I therefore sent an equalll bolshie email back informing them that when I had compiled my shortlist, I would get back to them. However, I tend to think that their appraoch has turned me off including them on any shortlist I compile.

  2. David Eadie says:

    As usual Jane, your advice is spot on. Despite the advice of my wife (a lawyer) and myself (an accountant) a relative of mine recently signed a franchise agreement and I have the awful feeling that the Franchisor is not to be trusted. Following our advice ( particularly my wife’s) he obtained specialist legal advice but still went ahead believing the agreement was now drafted more fairly. But, as I have been informed by other professionals, contracts made with untrustworthy parties, are not worth the paper they are written on. I just hope we are wrong about the Franchisor, but somehow I don’t think we are…..

  3. Jane Lambert says:

    Thank you very much for your kind words.

    The reason why franchise agreements are quite long, detailed and demanding is that there has to be a high degree of uniformity across a distribution network. So far as customers are concerned they expect to see substantially the same signs, colours, liveries and customer service at every outlet. If a franchisor indulges one franchisee he risks confusing or even disappointing customers as to what they can expect not to mention resentment from franchisees who are not so indulged. There is therefore very little room for negotiating an agreement.

    If an agreement makes unreasonable demands of the franchisee – by which I mean obligations that go beyond what the franchisor reasonably needs for the fair and efficient operation of the network and the preservation of his goodwill and other intellectual assets – then I would urge a client to think twice however attractive the deal may be in other respects. If a franchisor is prepared to make substantial amendments to his agreement one has to ask oneself why.

    As for the cost of obtaining specialist advice, I picked up a leaflet from HSBC which seems to have negotiated a deal for its customers with a solicitor called Nina Moran-Watson who will review and report on an agreement for £395 + VAT which seems to me to be quite reasonable. In his talk Mr. Pratt suggested that the average fee for a review by a solicitor specializing in this field would be around £400. A solicitor who does not specialize in this field may charge a lower hourly rate but he will be on a learning curve and spend a lot of time on fruitless correspondence.

    • David Eadie says:

      Thanks again for the follow up.

      Your comments make me even more concerned about the decision my relative made. The Franchisor is not a well-known name. Moreover, at present ( and there’s the rub) he does not require the franchisee to operate from business premises just to use the operating manual. But, my concern is that my relative will be “forced” to operate from premises (he cannot afford) when – as likely – he is unable to meet the Franchisor’s income targets etc.

      My advice is be extremely careful with an “unproven” Franchisor even if the business model seems profitable. and only invest money you can afford to loose.

  4. Jane Lambert says:

    You are wise to be cautious. Every franchisor has to start somewhere and there are some advantages in taking a franchise from a new network but all my warnings apply with added force to such a network. I would refer someone in your relation’s position to the 30 questions on Lloyds Bank;s website and I would also check whether the franchisor is in the BFA. Despite my caution about relying exclusively on the conventional guidance, the BFA does have standards and does its best to enforce them. My advice to your relation is to start making plans in case things go wrong for which he will need good professional advice. The solicitors on the BFA’s panel are as good a place as any to start and some of them I know personally.

  5. David Eadie says:

    Jane – Your comments are really appreciated and started to make me think. I re-examined the agreement which my relative signed. It says it is a “franchise agreement” and talks about the Franchisor and Franchisee. But, when I looked at the website it states that what is on offer is a “License opportunity”.

    I do not wish to take more of your time without paying for the advice, but, does any of this make sense to you?

    It probably explains why this franchisor is not a member of the BFA!

  6. Jane Lambert says:

    A franchise is a sort of licence but not all licences are franchises.

  7. David Eadie says:

    As the saying goes – we live and learn. My learning from this experience is always pay for the best advice you can afford. Once again, Thanks Jane.

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