When you’re starting a franchise unit, it’s important to get the basics right. So, we’ve laid out two of the most complex aspects of the business set-up process: signing the franchise contract and developing a business plan. There’s a lot of information here, so let’s get straight into the facts.
Signing the franchise contract
A franchise contract (or franchise agreement) governs the legal relationship between the franchisor and franchisee, covering everything from the franchisor’s support to the fees you’ll need to pay. It also acts as an insurance policy if the union doesn’t work out.
It’s important you understand every aspect of the franchise contract before you sign it. Here’s what you should expect it to include:
1. Which parts of the franchisor’s intellectual property you can use
The franchisor should provide clear information about the trademarks, copyright material and business strategies you’re free to use. The franchise agreement should also specify exactly how you should incorporate them into your business. It’s vital you understand this, as there may be harsh penalties if you don’t follow the rules. If you need extra clarification, be sure to ask the franchisor.
2. The contract period
Franchise units usually come with a fixed term of around five years, with the chance to renew it after that. The contract should detail any fees you incur, should you choose to exit before the end of the franchise term. Keep an eye out for relocation clauses, which could force you to close down and move to different premises.
3. Training and support
This section should list the training and equipment provided by the franchisor. It usually details exactly how much coaching you can expect to receive, and how this is delivered. For example, the franchisor might run workshops, on-site training or networking events. You should also get ongoing support, whether that’s in the form of regular site visits, an online portal or a 24/7 helpline.
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4. Your obligations as a franchisee
Consistency is one of the most important aspects of the franchise model, and if it’s not maintained, the business as a whole is likely to suffer. This section of the franchise contract will explain how you should comply with the systems laid out in the operations manual and make sure you adhere to operational standards.
5. Franchise resale conditions
There are many reasons why you might want to sell your franchise unit further down the road, and the agreement should allow for this to happen. Most franchisors implement measures to make sure your business maintains profitability into the future. This might include a clause giving them the right of first refusal if you sell up, so they can buy it by matching the price you’d get from another buyer.
Also, the franchisor usually has the final say on any buyer’s suitability. The person taking over your franchise unit will need to be able to be a great franchisee too. If your franchisor decides they lack the experience, personality or capital to take the business on, they can turn them down and ask you to continue your search.
6. The consequences of a breach or termination of contract
If you breach the contract in a minor way, you’re usually given the chance to remedy your actions according to BFA regulations. But if a contract termination is necessary, you will no longer be able to use the business’s trademarks, strategies or other intellectual property. The franchise contract will provide more detail about what happens in these circumstances.
One more thing…
Don’t suffer in silence if you think your franchisor has missed something. Although they’re unlikely to alter the franchise agreement just for you, they may be willing to give you extra information to help you out…
There is no reason the franchisor cannot give you additional documentation to clarify something in the agreement that is confusing to you or your attorney. – Inc.com
The business plan
Your business plan will set out your ideas and goals for your venture. It covers everything from your financial requirements to your personal management style, and will be instrumental as you develop your business over time. If you need to borrow money from an official lender, they will scrutinise your plan. You’ll need to show them they’ll get their money back at the end of the lending period.
Your finished document should be between 20 and 40 pages long, but shouldn’t take more than 15 minutes to read. Make sure it’s easy for people to find the information they need; you could include bulleted and numbered points if this makes things clearer. Photographs and diagrams may also come in handy and help the reader on their journey to understanding your business.
Don’t rush through the process of crafting your business plan; a carefully thought-out strategy will set you on the path to successful entrepreneurship. Here’s what your business plan should include:
1. An introduction (AKA the executive summary)
Like any article, essay or piece of written work, your business plan needs an introduction. Provide a brief overview of the organisation you intend to launch and the milestones you’d like to reach once you’re up and running. If you can, note down how you will work towards these goals and review your progress.
Before you bring this section to a close, draw out a couple of market rivals. Who will you be competing against and how will you differentiate yourself? When you’re choosing which franchise you’d like to join, think about whether your product will be better, more attractive, cheaper or more convenient than those already being sold locally.
2. A description of the franchise
Lenders will want to find out more about the franchise you’re joining. You’ll need to explain how it has been successful in the past, with accurate facts and figures if possible. Include details about any setbacks it has experienced and how it has overcome them. This way, you can show lenders your business is likely to succeed.
3. A description of your product or service
If your product range is fairly self-explanatory or straightforward, you don’t need to go into too much detail here. But make sure you highlight any important points when it comes to the service you offer. For example, you may opt to explain which products you are allowed to sell under your franchise agreement, and whether the franchise has exclusive rights to sell a certain brand.
The best business plans are straightforward documents that spell out the who, what, where, why and how much. – Paula Nelson
4. A management summary
How will you run your franchise unit? In this section, talk about your management structure and the team you’ll employ, if applicable. For key figures, include their employment history to demonstrate their expertise – as long as it’s relevant to your business. In short, you’ll need to show you have a capable team around you.
If you plan to start a franchise unit on your own, you could include some information about your own employment history. What makes you a great entrepreneur?
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5. Sales and marketing information
You won’t get very far if you can’t sell your product or service. Use this section to explain how you’ll generate leads and build up a customer base. If relevant, describe how you’ll encourage people to be loyal to your brand. Discuss the franchise’s marketing set-up; does the franchisor take care of promotion on a national level? Will you launch local advertising campaigns?
6. Financial projections
This will probably be the biggest segment of your business plan. You should work with your franchisor to develop accurate sales figures. They’ll be able to use data from existing branches to get an idea of how much money you’re likely to generate and how long it’ll take you to break even. Remember: it’s better to slightly underestimate your projected revenue than to be overly optimistic. You don’t want a nasty shock further down the line.
7. A description of any funding needed
Start this final section with a round-up of all the payments you’ll have to make. Include any franchise fees, set-up costs, ongoing royalties and marketing fund charges. To really give readers a good understanding of your financial needs, you can also develop cash flow, profit and loss, and balance statements. Again, use your franchisor’s data to inform your projections.
One more thing…
Once you’ve finished your business plan, take the time to make sure it’s formatted neatly. As Entrepreneur writes…
Nothing peeves investors more than inconsistent margins, missing page numbers, charts without labels or with incorrect units, tables without headings, technical terminology without definitions or a missing table of contents.
If you’re interested in starting a franchise unit, you should take the time to find out as much as you can about the franchise model. This includes boosting your knowledge on the franchise contract and how to develop a business plan. To learn more about becoming a franchisee, browse our bank of handy resources.
Alice Tuffery, Point Franchise ©