The Language of Small Business Texts and Vocabulary Training (for students of Economics) Part 1. Учебное пособие

Franchises

A low service fee is not necessarily an advantage for you. It is crucial that the franchisor retains an on-going interest in promotion and improvement of the business format, and that will only be achieved by the reliance on some sort of continuing payment from the franchisee.

The franchisor prefers to base the service fee on sales rather than profits. This is because monitoring the franchisee accounts to ensure that the franchisor is receiving the proper amount can be time-consuming and expensive. If the fee is based on profits rather than sales, the monitoring has to apply to costs as well as sales, doubling the difficulty of the task.

However, a fee based on sales can be disadvantageous to the franchisee. If the costs of the enterprise prove to be higher than forecast, paying the service fee could be an onerous burden for the franchisee.

You should not underestimate the size of the service fee, because it is based on sales not profits. If, for example, your costs are 60 per cent of your sales value, a service fee of 10 per cent of sales translates into a service fee of a quarter of the profits you make. Work out the figures before you sign.

One point to watch out for is what happens at the end of the original franchise contract if you want to renew. Does the contract allow the franchisor to increase the size of the service fee? Try to negotiate on this as you do not want a bigger percentage of your hard work to be passed over to the franchisor:

•advertising levy: a number of franchise packages charge an advertising levy as well as the service fee, this is usually calculated as a percentage of sales and paid at the same time as the service fee. The existence of an advertising levy could be regarded as an advantage for a franchise if promotion of the brand name is a very important part of the franchise success. If an advertising levy is made, look to see if this will be audited separately in the franchisor's accounts so that you can see that it has indeed been used for that purpose and that alone, not just disappeared into the franchisor's pocket.

If there is no separate advertising levy, the franchisor may

undertake to spend a certain proportion of the service fee each

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year. The other common alternative for advertising is that the franchisor will undertake to advertise as and when needed. With some franchises, the franchisee is expected to advertise as well as, or even instead of, the franchisor. This could lead to promotions which are at odds with each other – and may mean that the prestige of the franchise name deteriorates.

•mark-ups: one apparent advantage of grouping together can be that buying in greater bulk can mean bigger discounts and cheaper supplies. This should also apply to franchises, where supplies are often an important part of the cost of the enterprise. However, some franchisors put on mark-ups which deprive the franchisees of any benefit from bulk purchase;

•hidden costs of financing: it is not unusual for companies to pay commission to someone who introduces a new customer to them. This does not necessarily mean that you will get a bad deal if your franchisor helps you to arrange finance. But it does mean that you should shop around to satisfy yourself that you cannot organize a more attractive deal elsewhere. In practice, you may find it difficult to arrange finance except through the franchisor, but you should examine the possibility.

Finance

Raising money to finance the purchase of a franchise is treated in the same way as raising money to start any new business. All the clearing banks have specialist franchise units and, on the whole, they appear to look more favourably upon the average franchise application than on the average startup. This is because a franchise is believed to offer a lower risk to a lender.

However, any bank will require that a prospective franchisee contributes a proportion of the start-up capital, around 30 per cent. The remaining 70 per cent could be financed by the bank.

Any loan will need to be repaid by the end of the franchise term; however, there may be some leeway on the initial repayments of capital. For example, a repayment holiday could be arranged until the business is showing a profit.

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If the bank requires security this could be provided by a charge on the business assets, such as premises or equipment, but only if you run the franchise as a limited company. If you remain a sole trader, a mortgage on your house may be acceptable.

Territory

The interests of the franchisor and franchisee may clash when it comes to the allocation of territory. The franchisor would like the option to introduce another franchisee to the area to maximize sales and profits. The franchisee, on the other hand, does not want to be competing with another business on the same patch, selling identical goods.

Whatever is granted in terms rights, it is important to have clear identification of the territory. Check that it is clearly specified in the contract. The delineation of the territory should also be relevant to the particular trade. If it is a shop, perhaps a certain number of miles from the site would be relevant. If it is a service franchise, perhaps a Yellow Pages division of territories would be more suitable. It is also important to ensure that the territory is large enough to support a business of the type proposed. If you have any doubts, do not buy.

Premises

There is no set practice on whether the premises are owned or leased by the franchisor and sublet to the franchisee or the premises are owned and leased by the franchisee. It varies from franchise to franchise. Controlling the premises has advantages either way. If the franchisor owns the site, and if the franchise is not renewed, a valuable, well-placed site is not lost, as far as the franchisor is concerned. Conversely, if you are the franchisee and the premises are in your name, when it comes to renewal, you can use the site for another business if you would prefer.

Whatever the position about tenure, the location of a site, especially if it is for a shop, needs to be examined carefully, in exactly the same way as for any other business. Do not take the franchisor's word for it.

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Operations Manual

This is where the franchisor puts all the know-how of the business; it should incorporate the essence of the business format you are buying. One of the terms in the contract will be that you must adhere to the manual.

It will include details on everything: accounting systems, recruitment, how to carry out the actual process of the business (for example, grill a hamburger, print a leaflet or unblock a drain), reporting systems and so on. You should see a copy of the manual before you buy. Make sure you understand what is in there; it is how you will have to behave in your business while you own the franchise.

An indicator of the on-going interest of the franchisor can be how frequently the manual is updated. Ask how often this has been done.

Training

Training is an important part of what a franchisor is offering. Before you sign the contract, you need a clear idea of how much training there will be and how long it will take. You should expect training on all the basic business skills you will need to run a business. This includes financial methods, stock levels, operating the equipment, carrying out the process of the business, working out accounts and PAYE, employment law. VAT and so on ad infinitum.

Opening

The franchisor should help you to start your business. If it is a retail business, once the premises have been found, the franchisor will help organize the shopfitting. Indeed, it may be part of the agreement, as it may be that the shopfitting has to conform to the brand image: the colours, style of counter, type of shelves and so on.

Additionally, there will be advice available (it may even be a requirement to follow it) on the equipment and amount and mix of opening stock you should have. Find out before you sign what the franchisor's policy is on this and satisfy yourself that you are not being cornered into a policy of over-equipping and over-stocking.

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To have a successful opening day, you will need publicity and perhaps an opening ceremony; you should get help and advice on how to advertise and arrange media coverage. Find out the franchisor's level of commitment on this.

On-going Support and Supervision

This could consist of six elements:

1.refresher training (see above);

2.continuous product and business research and development;

3.troubleshooters and supervisors who give regular visits (see below);

4.updated operations manual;

5.advertising the brand as a whole;

6.advice on an individual level about promotion (see below).

Products do not last forever. So for any business there needs to be continuous assessment, of the product to see how well it meets its customers' needs, not just in the past, but now and in the future. Any market trends need to be taken into account and the product may need altering over the years to meet the new. criteria. Or, a completely new product may need to be evolved. For a franchise to be successful, the franchisor should devote some energy to this. Check what your franchisor's policy will be on this before buying.

The downside to this is that any innovations or alterations could end up being costly for the franchisee. Try to establish what the future plans of the franchisor will be and check what the agreement says about implementation of any new developments.

Another element of support and supervision by the franchisor is the help available if you or the business are in difficulties, for example, are there troubleshooters to provide guidance? The sort of questions you want the franchisor to answer include:

•how often will support visits be made and what is the caliber of the support staff?

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If the business is struggling to break even, does the franchisor have special troubleshooters? If not, what sort of help will be available?

•what happens if the equipment does not work properly? Are there maintenance facilities and what is the response time?

•if you are ill, is there an emergency staff team available to take over?

As well as the positive side of providing support, you must recognize that the supervisory team also fulfil the role of monitor for the franchisor. You will have to accept that they will want to examine your records and books on a regular basis, check that you are not understating sales (or whatever it is that the service fee is based on) and ensure that the service fee is paid on time.

A final element of support which you need to investigate before you buy is the advice available on promotion of your business. While it is a better arrangement for the franchisor to carry out the advertising and promotion of the product name on a national basis, you may feel that there are opportunities which allow you to boost your business by advertising and promoting locally. The franchisor may be able to advise on this. In fact, the franchisor may insist as part of the agreement that you promote locally. For example, is the amount of expenditure specified and will it prove onerous?

Finding and Bying a Franchise

There are around 300 franchises currently on sale. Of these, about ninety are full members of the British Franchise Association and thirty or so are registered associates. A full member has to have operated a successful pilot scheme for at least one year and to have at least four franchisees operating at the end of a further two years. Generally, to be a registered associate, the franchisor must have operated a successful pilot scheme for one year and to have at least one franchisee who has been franchising for a minimum of one full year.

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There are a number of organizations operating as franchise consultants who say they will give advice on finding a franchise. Before you use one, be absolutely certain that it is not an organization concerned solely, or even mainly, with finding franchisees for one or two franchise companies. If this were the case, the impartiality of the advice can be discounted.

Work out some rough guidelines for the sort of business you would be happy to be in and the sorts of areas of the country you would be prepared to move to. Estimate the sort of price you could pay, bearing in mind that you should be able to invest at least 30 per cent, while borrowing the remaining 70 per cent is a possibility.

Write to a shortlist of five or six franchise companies, asking them to send you the details you need. This should include projections of the likely level of business and a draft contract, as well as the areas where the company currently has a franchisee vacancy.

Once you have received the information, the hard work begins. Consult your solicitor and accountant. Carry out your own very thorough research investigating among other aspects, marketing, advertising, product lines, financial aspects, supervision. Use the step-by-step guide. There are also a number of other books and publications which have comprehensive checklists and questionnaires.

It is important to remember that if the franchise is a good one, the franchisor will be able to pick, and choose from applicants. Treat the negotiation with the franchisor from two points of view:

•the need to investigate and assess the worth of the franchise thoroughly;

•the need to sell yourself as an ideal applicant to the franchisor.

For a good franchise, you will need to provide references along with much more information about your suitability as a franchisee.

While you are negotiating, you may be able to reserve a particular territory by placing a deposit. The amount of the de-

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posit and whether it is partially refundable or not varies form franchise to franchise. Sometimes the deposit is set against the initial fee on signing. Check the terms and the franchisor's references before you pay it.

The Contract

This is the kernel of all franchises. Once you have signed it, it will rule your life. Do not skimp on independent legal advice. The contract will attempt to ensure that you run the business along the lines specified by the franchisor.

The contract should cover these areas:

•the type of business, its name and the use to which it can be put;

•the territory for which the franchisee will have the rights to use the name;

•how long the franchise will run;

•what the franchisee will have to pay (the initial fee and service fee);

•if the franchisee wants to sell;

•if either the franchisee or franchisor wants to end the agreement;

•what both the franchisor and franchisee have agreed to do.

The Type of Business, its Name

This part of the contract will describe the franchise. It will indicate that the franchisor has registered any relevant trade mark or patented any invention. The franchisee will probably have to agree not to handle any trade mark, product or service belonging to a competitor of the franchisor.

The Territory

The contract may specify that the franchisee will have the sole and exclusive right to run the franchised business in a particular territory. In return, the franchisee will agree not to sell

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outside that allocated territory, as that will be the province of another franchisee. There may also be certain restrictions in the type of customer, for example, that you cannot sell to government organizations.

How Long the Franchise will run

The typical length of a franchise is five years. But it could be as short as three or as long as twenty. Normally, you can renew the franchise at the end or the original agreed period, but this may be subject to satisfactory performance. You should certainly want an option to renew and you should try to ensure that the legal working about what constitutes a 'satisfactory performance' is clear to you, fair to you and can be enforced by you. This is essential, because unless you have the lease on the premises, you would have very little to show for your work at the end of the period. You would not be able to sell the business as a going concern, because you would no longer have the rights to the name or to use the business format, and without these there is little goodwill to be attached to the business.

Some contracts specify that if you do not wish to renew, the franchisor will buy the business from you, including a value for goodwill. The value put on the business will be set by an independent accountant.

If you have an option to renew, the contract may specify that certain sums of money are spent to update the premises and smarten the business. The details of this commitment need to be buttoned down in the contract. In any case, the option to renew may well be to renew on the terms currently on offer to franchisees; these may be less favourable to a franchisee than the terms on which you originally signed.

If you have decided not to look for another agreement with the franchisor, the contract may restrict your activities. It may specify that you cannot carry on a similar or competing business for a certain length of time.

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What the Franchisee will have to pay

The contract will specify the amount and the nature of the fees which will be paid, that is, the initial fee, the service fee (or royalty) and, if applicable, the advertising levy.

If the Franchisee wants to sell

Most agreements include some arrangement whereby the franchisee can sell their business during the course of the term. The contract may specify that the franchisor will be entitled to first refusal. Additionally, one of the conditions may be that the franchisor has to agree that your buyer is properly qualified to run it. Your buyer will have to receive training and probably have to be prepared to sign a new agreement. However, in reality, it will be difficult to give the same sort of rigorous vetting that the franchisor can do for the initial holder.

Watch out for the sort of agreement which allows the franchisor to charge high transfer (or other) fees on a sale. This sort of condition could effectively block any sale you might make, except to the franchisor on poor terms.

A contract should also include the terms and conditions which apply if you die during the agreed period of the franchise.

If Either the Franchisee or the Franchisor wants to end the Agreement

It is possible that you want to end the agreement, if you find that the business is hard going, for example. In those circumstances, it may be difficult to find a buyer. On the other hand, it is not especially in the franchisor's interests to insist on keeping you to the agreement if you are not making a success of it. The contract should deal with what can be done in these circumstances. You need to satisfy yourself that the contract would treat you fairly.

The contract will also specify the conditions under which the franchisor can end the agreement. This could occur if you break

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