Key things to consider when thinking about a franchise

Franchising is a compelling business model that enables individuals and companies to operate under established brands, granting them the rights to sell products or services with a proven success record. Franchising can open doors to new revenue streams and innovative business partnerships. This article outlines the essential aspects of franchising and the key real estate considerations.

Understanding franchising

Franchising involves a franchisor, who owns the brand and business model, and a franchisee, who signs a contract/franchise agreement to operate a business using the franchisor’s brand and business model. This relationship allows franchisees to leverage the established brand reputation, support systems, and operational procedures while retaining a degree of independence.

Choosing the right franchise

Selecting a franchise is a significant decision that requires thorough research and analysis. Here are essential factors to consider:

• Reputation and brand strength: Well-established franchises with a strong market presence and positive consumer perceptions. Research brand history, customer reviews, business strategy and financial stability
• Support and training: Investigate the level of support offered by the franchisor. Comprehensive training in operational procedures, marketing, and management is vital for your success
• Initial investment and ongoing fees: Understand the financial requirements, including initial franchise fees, royalties, and other ongoing costs. A transparent financial model is essential for assessing profitability.

Legal considerations

Franchising in England is generally governed by arrangements that aim to protect both parties involved. It’s imperative to have a solid understanding of the legal framework:

• Franchise agreements: Carefully evaluate the franchise agreement terms, ensuring you understand your rights, obligations, financial metrics and the conditions under which the franchise agreement can be terminated.
• Intellectual property rights: Be aware of trademarks and branding laws associated with franchising. Ensure that the franchisor has registered all relevant intellectual property rights.
• Real estate: Consider competitors in the market; location; footfall; and other opportunities and whether those markets will provide the base to build a successful franchise . It is also important  to understand property and letting arrangements and financial costs associated with the business.

Assessing the real estate market

The majority of franchise opportunities involve high street, customer facing operations, either in F&B, hospitality, medical and occupational health. Before diving into franchising, it’s crucial to comprehend the local market and competitor landscape.

It is very common for franchisees to be granted operational areas. Depending on the size and nature of the franchisor, this might be limited to specific towns or certain geographical areas. This will be part of the initial discussions and then an ongoing process as the relationship develops. Location and understanding the local market will be key.

In England, real estate remains robust, with diverse opportunities across sectors like retail, office spaces, and industrial units. Key considerations should include:

• Market demand: Understanding what products or services are in demand within your area can help determine the franchising opportunities available
• Location analysis: A strategic location is critical for a franchise’s success. Analysing footfall, competition, demographic trends and age groups, and accessibility can guide decision-making
• Regulatory environment: Familiarise yourself with local bylaws or arrangements such as BIDs, licensing, and regulations that apply to franchising in your chosen sector.

Property arrangements

The following should all be considered at the outset when dealing with the letting and legals:

• Tenant: It is more common now for franchisors to require the lease to be granted directly to the franchisee. As a result it is likely that the tenant will be an SPV (newco) and the lack of financial history/covenant will result in the landlord requesting additional security such as a guarantor or a large rent deposit.

Alternatively the franchisor will take a headlease and grant an underlease to the franchisee. This can result in a lease that is heavily weighted to the franchisor as the immediate landlord. Ultimately there is little room for negotiation on the terms of the direct lease. It also means that there is limited involvement for the negotiation of the franchisor’s headlease.

• Permitted use: You should ensure that the use permitted under lease allows for full operation. You should also check that the requisite planning permission is in place, for the use and for any other operations or works
• Alterations: The franchisor is likely to have strict reigns on the fit-out of the property so as to ensure it mirrors branding; signage and layout. You should ensure that you have full plans and specifications so that you can obtain the landlord’s consent to such fit out works. If you are operating an F&B or hospitality business then you should consider M&E and plant works. It may be that you need to make arrangements for the location of plant outside of the area of the property being let i.e. on the roof or an external wall
• Rents: It is important to understand the financial obligations the franchise will be required to comply with. Negotiating the annual rent and rent review mechanics is important as well as understanding other financial commitments for example the rateable value and what business rates will be payable in addition to other operating costs.

Building a strong franchise network

Networking with other franchisees and professionals in the franchising sector  can provide support and insights. Consider joining franchisee associations or attending relevant trade shows and seminars. Networking helps share experiences, challenges, and successes, fostering a collaborative environment that can benefit all operators involved.

Conclusion

Franchising presents a unique opportunity for operators in England to expand their business horizons and tap into the potential of established brands. By thoroughly understanding the franchising model, assessing market conditions, complying with legal requirements, managing finances effectively, and committing to ongoing learning and adaptation, operators can create a thriving franchise enterprise.

At Thomson Snell & Passmore we have a long established history of working with franchisees and supporting them on their journey. If you require any assistance or have any questions then please get in contact.