While the effort involved to get started can be considerable and lengthy, the long-term rewards can be immense if you go about it the right way and involve professional help from the outset.

Benefits

Growing your business using the franchise method is an exciting and proven method to accelerate your business and, if you have the right business model and the right systems in place, there can be many benefits including:

• relatively low level of investment – franchisees must pay for their franchise so, essentially, you are using their capital to fund your business growth
• the power of duplication – once you have a successful business model in place you prepare one set of standard operational guidelines for each of your franchisees to follow
• quality business partners – you have ultimate control over who runs your franchises and the franchisees should remain motivated to succeed because they’ve invested upfront in the business

• effective quality control – each of your franchises will be following the same formula and have a contractual duty to maintain the same standards.

Disadvantages

As with any business expansion, there are difficulties and pit-falls to be aware of when thinking of starting a franchise operation.

Disadvantages include:

• cost and effort involved in setting up. You’ll need to budget carefully as there’s an awful lot of work involved in the beginning, e.g. clearly documenting your business model and systems, researching the market to see if your business idea is viable in other locations, producing information packs and operations manuals, marketing and advertising, interviewing potential franchisees etc
• difficulty in finding suitable franchisees – you need to apply rigorous selection criteria, after all, your success is dependent on them
• time and cost involved in establishing a suitable management structure – chances are your existing management team won’t be able to cope with a rapid expansion. Good management is critical to the success of a franchise operation and may cost a lot of money

• legalities – even the simplest franchise will require considerable involvement from an experienced lawyer. Having the right terms and conditions in place will be critical to the success of your venture.

Getting help from the outset

The first thing you should do if you’re considering franchising your business is to speak to an experienced commercial lawyer. It may seem like a big expense at the outset but it’s sure to save you money and heartache in the long-run.

Truelegal will guide you through the process and ensure that you make informed decisions. Most importantly, your lawyer will draft your franchise agreement – probably your most valuable business document. If you get the agreement wrong, rogue franchisees may ruin your franchise brand and reputation or even copy your idea and start up in competition.

The franchise agreement

In essence, the franchise agreement will determine how enforceable your rights are against your network of franchisees.

Key to your success is having a set of terms and conditions that are sound, clear and fair – these are people that (hopefully) you will have a long-term working relationship with and you want to do everything possible to ensure that that relationship is a harmonious one. A poor franchise agreement could deter new applicants or leave you unable to get rid of a bad one causing you and other franchisees difficulties and problems.

The terms and conditions will vary from franchise to franchise but should include the following:

• Term
  The term of the franchise agreement covers how long the franchise lasts, how it is renewed and on what terms. It also looks at how the franchise can be terminated early and may include performance criteria.
• Territory
  This is the geographic area which each franchise will cover. Will the franchisee have exclusive rights and how will the borders of franchise territories be covered?
• Fees
  Usually the franchisor will charge an initial fee, royalties on sales and a regular management fee. You may also want to charge for additional costs such as joint marketing.
• Support
  The amount of help you provide is often critical for success both when the franchisee starts their business and on a continuing basis, as they progress.
• Restrictions
  Most franchisors place restrictions on what franchisees are and are not allowed to do. It is normal to stipulate how the franchisee should run their business. Minimum stock and staffing levels are common, as are where the franchisee purchases their stock and how much they can sell their product or service for.
• Exit
  What happens if a franchisee wants to sell their business, or what happens if they can’t continue in business for some reason – perhaps due to ill health or lack of funds? You will need to retain control over who they sell their business to.
• Other items which need to be considered include how “goodwill” is treated, provisions for insurance cover, and protection of your intellectual property rights.

From your perspective, a franchise agreement should encourage good franchisees whilst providing positive, proactive remedies for those who are under-performing or causing difficulties for you or other franchisees. In addition, the agreement needs to allow your franchisees the right amount of freedom so that they feel the business is their own whilst protecting you from fraud, misconduct and the stealing of your intellectual property. It’s important to provide the right amount of support for your franchisees but you must also make sure that this operation does not cost you too dearly in terms of resources and money.

One thing’s for sure, whatever your reasons for selling up, the level of care and effort you put into the sales process will have a significant influence upon the price you receive for your business – and upon how long it will take to complete your sale.

Truelegal can assist in valuing your business, identifying the best strategic purchaser and advising you of tax implications. In addition, we can help you put together an information pack for prospective purchasers, market your business, carry out due diligence and, of course, draft and help you negotiate the final sale and purchase agreement.

Forward planning

Selling a business is not a quick-fix solution: the process can begin as much as a year or two in advance. You’ll need to have a clear understanding of your objectives, an informed view of the marketplace and, above all, time to prepare your business so that it is in the strongest possible position to maximise proceeds at the time you sell.

Professional help

Early involvement of an experienced solicitor and accountant is vital: they will advise on how best to groom your business and allow you more time to carry on with its day-to-day operation. They may also assist in valuing the business, identifying the best strategic purchaser and advising you of tax implications.

Fail to prepare and prepare to fail

If you’re serious about getting the best price for your business, you’ll need to do more than simply tweak the figures on the balance sheet. You need to take an objective look at your business from every angle and identify where and how you can make it more efficient and profitable so that it proves irresistible to potential buyers. You’ll also need to consult – and if necessary, negotiate with – other shareholders and review the terms of any shareholders’ agreement.

Areas of the business which you should consider include:

• improving profits through identification and elimination of excessive or unnecessary personal benefits and/or expenses
• increasing your sales figures through aggressive campaigning or offering special deals for customers
• ensuring that employment contracts are formalised and up-to-date
• ensuring commitment from customers and suppliers by formalising deals with appropriate contracts
• ensuring that an effective communications plan is put in place to keep staff, customers and suppliers informed of the possible change
• reducing costs by avoiding big purchases in the run up to the sale
• ensuring that your information systems are up-to-date and transparent
• removing uncertainties in respect of any disputes, claims and actions against or on behalf of the business
• putting a tax efficient structure in place to ensure personal tax liabilities are reduced on disposal
• working at establishing a market presence that differentiates you from the competition – some businesses undertake some pre-sales PR to raise their profile

• ensuring the business looks its best for when potential purchasers visit – this may be as simple as a new coat of paint for the premises 

The sales process

 Once the groundwork has been done in terms of getting the business into shape, you’ll need to put together an information pack for prospective purchasers. This should include:

• the information memorandum – this is the prime selling document and is governed by the Financial Services Authority. It will include basic information about:
• details of your organisation
• position in the marketplace
• operational activities
• products/services offered
• details of management and staff
• prospects for future growth
• financial information, including :
• 3 years’ profit and loss (income) statements
• tax returns for the business
• details about any leases
• a list of loans against the business, with balances and payment schedules
• business plans

Marketing the business

With your business now (hopefully) operating from a position of strength, and armed with all the necessary information, you can now think about marketing your business. But give some thought to what time of year might be best to start: sales cycles or seasonal fluctuations may have a further impact on a potential buyer’s perception of your business.

Professional advisers will be able to use existing contacts and networks to identify potentially suitable purchasers and will also know how to research other possibilities. They will also usually make the first approach to a potential purchaser. Other possible marketing channels include newspapers, trade magazines and the internet.

The bidding process

 Following the initial approach, prospective purchasers are usually given up to six weeks to propose an indicative bid. Due diligence may be carried out on your behalf during this period to provide more in-depth information than the information memorandum and to clear up any areas of uncertainty. Following this more detailed report, prospective purchasers will be asked to submit formal bids. Obviously, the more interest you can generate, and the more competition for the purchase, the better the price you should be offered. Your professional advisers will help to evaluate the bids and negotiate with potential purchasers.

Once you award exclusivity to one purchaser, it is normal for that purchaser to then undertake their own due diligence in order to verify that all the information you have provided them with is correct. Only then will the purchaser be in a position to decide whether to continue with the acquisition, or perhaps lower their offer.

Completion

Once a deal is struck, the solicitors will need to put in place a ‘sale and purchase agreement’ and final negotiations will take place before contracts are exchanged.

If you would like more information about how we can help you fulfil your company secretarial duties contact us.