Franchise Advice
t is estimated that two-thirds of UK businesses are family owned and we can speculate that a fair number of the remainder are businesses started together by friends.* Many prospective franchisees are families or friends looking to invest in a franchise venture together and there are many advantages in doing so. The costs of investment will often be shared and roles can be allocated to manage the launch more effectively. On a more personal level, the individuals will have shared vision and values, and will benefit from the moral support they offer each other as they embark on the challenging but fulfilling journey of independent business ownership. If you are thinking of teaming up with family or friends in a franchise business, the outlook is promising. However, there are a number of practical considerations to be mindful of. Addressing these matters openly in the early stages will further ensure not only the success of your franchise business, but, just as importantly, the steadiness of your relationship.
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The franchise agreement The franchise agreement is the agreement signed between the franchisor and the franchisee entity. As it is a family business, we can anticipate that the partners will also be directors of the franchisee entity. Typically, a franchise agreement will require at least one of the directors sign the agreement as the principal, who will be personally responsible to the franchisor for guaranteeing that the franchisee fulfils their obligations under the franchise agreement. The guarantee often includes an indemnity and, therefore, the principal’s personal assets could be at risk if the business fails or the franchisee breaches the franchise agreement. The personal guarantee and indemnity the
principal must sign is a serious financial burden and so the partners will need to consider between them how to share it. If one partner will be taking a more active role, it may be more appropriate for them to be named as ‘principal’, as they will have more control over how the business is being conducted. Alternatively, the partners can all be named as a ‘principal’, and so will need to consider between themselves how to manage personal risk. The personal guarantee and indemnity
franchisors require is often a sticking point because of the personal risk each investor takes. Therefore, it is important that partners or investors are aware of the issue, so it can be addressed effectively well in advance of signing the franchise agreement.
Clarifying roles It is likely that each partner will have different skills, qualifications and availability. It is important to have open discussions about what role each partner will have in the business and how much time they are willing to commit to it. These discussions should take place at the very early stages, perhaps even before selecting the franchise. This way, partners will be able to assess the franchise proposal on the basis of their values, time commitments and financial status, as well as strengths and abilities. Additionally, when applying for a franchise, a
franchisor will want to know how the roles and responsibilities will be shared between business partners. This will determine their assessment of: whether the partners meet the franchisor recruitment criteria; who will need to undergo training; and who will be the main point of contact, or the ‘key person’ or ‘manager’ under the agreement. If all partners intend to take an active role, then it can be anticipated that the franchisor will want all partners to be named as principals or key persons.
Shareholders’ agreement The shareholders’ agreement is potentially the most important of considerations. Putting together the agreement early in the relationship has the value of forcing partners to consider various scenarios that occur during the life cycle of a business and how they would want to deal with them in advance. It gives partners a framework for how they will work together, as well as the benefit of effectively reducing the risk of disputes, as there is a process in place for dealing with potential scenarios that each partner has already agreed upon. Each partner knows what they are committing to and what the other partners expect of them. A good agreement will set out, among other things: • What decisions the investors must agree on unanimously
• Each investor’s financial contribution and any benefits or rights they are entitled to as a result
• How dividends will be distributed • What happens if one investor wants to sell and the other does not
• Succession planning, ie what happens if an investor dies.
The benefits of starting a new business venture with family or friends is an exciting proposition and, statistically speaking, one of great potential returns. Those returns can be maximised by avoiding the difficult and awkward questions and setting a clear framework with clear expectations early on. n
Roz founded Goldstein Legal in 2006 and is a bfa-accredited qualified franchise professional. She was appointed to the board of the British Franchise Association in December 2016.
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*Source: Institute for Family Business
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