FranchisinG 2017 · franchise consultancy and recruitment firm advising high calibre franchisors who between them have recruited many thousands of franchisees following Andy’s blueprint

FranchisinG 2017Virtual round tablewww.corporatelivewire.com

2 3OctOber 2017 OctOber 2017

Round Table: FRanchisinG 2017

Introduction & Contents

Franchise Roundtable 2017 discusses the benefits and drawbacks of establishing a franchise and the regulations which are currently implemented to protect both franchisors and franchisees. The roundtable identifies current trends and strategies related to franchising; paying particular attention to the surge in mobile businesses. Highlighted topics

include: the importance of a carefully thought out franchise agreement, how to effectively evaluate a franchise opportunity, and an outline of the main considerations following the termination of a franchise agreement. Featured countries are: Brazil, Colombia, New Zealand and United Kingdom.

Editor In Chief

James Drakeford

1. What are the main pros and cons of establishing a franchise?

2. Who are the main regulators and what legislations apply to franchises in your jurisdiction?

3. What kind of franchise is currently proving popular at the moment, and why?

4. Are you noticing any new trends, structures or interesting strategies currently being implemented?

5. Can you outline the required disclosures that must be made to a franchisee?

6. What are the potential problems likely to be encountered when offering franchising opportunities?

7. What steps should be taken when evaluating a franchise?

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8. How does this differ depending upon whether you are evaluating a local or international franchise?

9. What should be included in a well-drafted franchise agreement?

10. What restrictions are typically set out in franchise agreements?

11. What are the main considerations following the termination of a franchise agreement?

12. What are the most important tasks franchisees should prioritise during that crucial first year?

13. What are the most frequent questions people ask before proceeding with a franchise?



Damian heads up the Ashtons Legal’s nationally recognised franchise team, which provides a first class service to many of the country’s leading franchise brands.

His work involves helping franchisors set up and grow their franchise networks with a particular emphasis on helping franchisors expanding their brands internationally.

Damian regularly speaks at franchise industry events (both nationally and internationally) and has been awarded the Qualified Franchise Professional qualification by the British Franchise Association.

Founded in 1994 by Chris Allison, the Auditel service was pioneered to help UK companies make effective and informed procurement decisions in the newly deregulated energy and communications markets.

Since then we’ve built a strong network of over 180 business management specialists and nurtured relationships with a wide range of business suppliers. The synergy this creates

allows us to provide powerful solutions to today’s business challenges.

We go beyond just helping you manage your costs – although we’re good at that too.

Working together, we can uncover opportunities to accelerate your business performance in an ever changing and competitive marketplace.

Experience, skills, knowledge

Since 1994 we’ve been building our UK-wide network of business management specialists. Today they number over 180 and come from a wide range of professions, commerce and industry, all trained by us to deliver the highest standards of consultancy and analysis.

This means you can instantly benefit from one completely independent and impartial point of contact for the most up to date market and supplier intelligence.

Iain Bowler is global co-chair of DLA Piper’s franchise and commercial contracts group. He advises on franchising, brand licensing and commercial contracts activities in the retail, food and beverage, hospitality and leisure and consumer goods and services sectors.

Iain is recognised as a leading practitioner in franchise law in Chambers and The Legal 500, is contributing editor to Global Legal Group’s International Comparative Legal guide to Franchising and is an Affiliate member of the BFA.

Iain advises on commercial transactions of all descriptions including business format franchising and brand licensing, and has advised clients on franchise joint ventures and multi-unit structures in Russia, Poland, China, SE Asia, Europe, the US and the Middle East.

Andy Cheetham Managing Director of Lime Licensing Group has a stellar franchising background as a result of conceiving, establishing and subsequently selling several franchise brands of his own. More recently he has been a trusted advisor to several UK franchising entrepreneurs.

Andy owns the Lime Licensing Group which has grown to become a very successful franchise consultancy and recruitment firm advising high calibre franchisors who between them have recruited many thousands of franchisees following Andy’s blueprint. Andy also owns the franchise directory www.franchiselife.co.uk and his team includes skilled marketers, recruiters and seasoned franchise professionals to provide a professional outsourced service to any new or established franchised brand.

Expertise in merger and acquisition transactions and in preventive contractual and corporate consulting, in addition to experience in litigation. Also active in the fields of energy, information technology, infrastructure and realty law.

Member of the International Relations Committee of the Studies Center of Law Firms (CESA).

Member of the OAB (Brazilian Bar Association) since 1998.

Damian Humphrey - Ashtons LegalE: [email protected]: www.ashtonslegal.co.uk

Chris Allison - AuditelE: [email protected]

Iain Bowler - DLA PiperT: +44 (0) 2077966311E: [email protected]: www.dlapiper.com

Andy Cheetham - FranchiseLifeE: [email protected]: www.franchiselife.co.uk

Paulo Yamaguchi - Tess AdvogadosE: [email protected]: www.tesslaw.com.br

Meet the experts



Jane Masih is one of the most experienced franchise solicitors practicing in the UK today. Appointed as head of Owen White’s Franchise team in 2002, Jane has been advising franchise clients for 31 years in the development of their franchise networks including drafting franchise agreements and master licence licences, acting in the sale and purchase of franchise businesses and advising franchisees on the acquisition of franchises.

She regularly speaks on franchising topics, writes articles on various aspects of franchising and has been invited to judge the HSBC Franchisor and Franchisee of the Year Awards and the Franchise Marketing Awards on numerous occasions

Jane has served on the Board of the BFA and is a founding member of EWIF, winning ‘Outstanding Contribution to Franchising’ in 2014.

From my involvement on copyright and trademark matters I have developed a strong practice on franchising and advertising law that focus on compliance with consumer protection statutes and third parties rights. Recently advised the most important credit card brands, and companies involved in cutting edge technology and social media such as Intel and Facebook, as well as many other with equally demanding high standards of legal counsel.

Also with my IP expertise and contractual background I have helped foreign and local companies implement franchise operations in our country that take advantage of of the current propitious business climate. To name a few of the recent Franchise companies that have initiated their operations in Colombia with our help we have The Gap, P.F Chang’s, Johnny Rockets, Villa Pizza, Engel & Volkers, Hard Rock Hotels, Hertz.

Stewart Germann who is acknowledged as New Zealand’s leading franchising lawyer with over 35 years experience in this area, is a recognised national and international guest speaker at franchise conferences (New Zealand, Australia, USA).

Stewart Germann Law Office is New Zealand’s longest established specialist franchising law firm and Stewart is one of only two New Zealand lawyers included in the International Who’s Who of Franchise Lawyers for 2014.

Stewart’s clients include many of New Zealand’s best known national and international franchise brands and he has extensive franchising contacts worldwide and locally.

He is actively involved in international franchising and has published articles in the International Journal of Franchising Law.

An experienced national and international franchise development consultant, I have worked in the UK franchise industry for a premier UK and international consultancy ( acquired by Ashtons Franchise Consulting in 2015) for over 15 years. During this time I gained considerable knowledge across the majority of business sectors and sizes - from pre start-up to PLC.

I am a longstanding advocate of ethical franchising practices and with Ashtons Franchise Consulting (incorporating Franchise Development Services) work to educate business owners and the public about franchising .

As a leading provider of franchise services, we aim to help established and prospective franchisors and franchisees succeed. We provide clients with the advice, guidance, and resources they need to achieve tangible, measurable results – be it bank support, building a sustainable franchise system, or growing their network. We pride ourselves on a superior service that recognises the individuality of clients’ businesses and needs, offering well?founded advice, valuable tools and needed exposure.

Jane Masih - Owen WhiteT: +44 (0) 1753 876800E: [email protected]: wwwowenwhite.com

Juan Carlos Uribe - Triana Uribe & MichelsenT: +57 1 601 9660E: [email protected]: www.tumnet.com

Stewart Germann - Stewart Germann Law OfficeT: +64 9 308 9925E: [email protected]: www.germann.co.nz

Nick Williams - Ashtons Franchise ConsultingT: +44 (0) 1603 703254E: [email protected]: www.ashtonsfranchise.com

Meet the experts



Allison: Franchising provides the most successful business format for those who wish to become self-employed. Over 90% of franchisees who have invested in franchise models accredited by the British Franchise Association (“BFA”) are successful in establishing prof-itable businesses, whereas over 80% of standalone busi-ness start-ups end in failure over a three to four year period according to major clearing banks. Businesses wishing to franchise need to assess how long it will take to build a full business format franchise model that can be replicated by others. Usually this takes more time and investment than most potential franchisors think. The skill sets required to develop a franchise are usually quite different to the ones required to run a business. Sourcing the right talent to train and support the busi-ness model is key to success. Investing in a full busi-ness format franchise is a long term commitment as it takes time to establish franchisees’ businesses. Taking advice from franchise experts at the outset will short-en the learning curve and accelerate the growth of the business. Anyone embarking on a career in franchis-ing should assess whether they have the drive, ambition and tenacity to build a business and importantly follow a tried and tested business model. Almost invariably, the failures associated with franchising are down to new franchisees not following the business system.

Yamaguchi: The main pros of franchising are: • Franchises can generate substantial financial re-

turns with relatively little risk. Instead of using the entrepreneur’s own financial resources to fund the expansion, the entrepreneur can share this cost with other investors, meaning that there is easy expansion capital.

• Franchisees will benefit from an established

brand and a consolidated know-how, together with a broader, structured marketing strategy.

• Franchising is also a way to source talented peo-ple who want to start their own venture rather than simply being an employee.

• There is a very active association in Brazil, Asso-ciação Brasileira de Franchising (“ABF”), which is positioned as a self-regulating institution for franchise activities.

The main cons of franchising are: • There is less control over operations and there is

no direct command over the franchisees. Fran-chising is a contractual relationship, despite the controls and obligations that are set out in the respective franchise agreements.

• It takes time to implement new things since there are many different entities to train.

• In Brazil there are cases in which employees of the franchisee view the franchisor as the em-ployer. Labour courts have ruled in favour of these employees when evidenced that the fran-chisor influences significantly the franchisee’s business, giving direct instructions and impos-ing the organisation.

Williams: Many businesses consider franchising but not all of them continue into the marketplace. It is quite straight forward to understand the initial and genu-inely sound potential benefits of franchising, which are:

• Quicker replication than may be possible when growing corporately.

• Committed franchisees work harder, longer and are more dedicated than paid employees.

• Franchisors are not responsible for investment

in the location or for the ongoing development of the brand in the territory, area or location awarded to the franchisee.

• The franchisee takes financial responsibility.• The franchisor does not have to maintain such a

substantial central business, inventory or work-ing capital requirement as would be necessary if expansion were purely organic.

• The franchisor is able to use their franchise model, once tested in the market here, to rep-licate internationally and reap the benefits of doing so.

However, the disadvantages are:

• The franchisor takes a percentage of the trading margin from each location rather than receiv-ing the whole revenue.

• The franchisor has to consider brand risk and reputation. This can be managed but never

eliminated; however it is wise to note that many successful high street brands have grown through franchising without experiencing sig-nificant difficulties.

• Franchisees do not always follow the system and inevitably there will be some fallout, how-ever this is also often the case with staff.

• Franchising is not straight forward. If one is to implement it properly and for the long term, it makes sense to seek professional advice and guidance from the beginning. This is a small investment in relation to the overall return. The franchisor is setting up an entirely separate business to the one which they are running – in effect they are now licensing others, and teach-ing them how to use their concept, methods, products and brand. They will be motivating, monitoring and developing their franchise net-work for optimum mutual benefit.

1. What are the main pros and cons of establishing a franchise?



Carlos: The pros of franchising are often oriented to-wards diminishing the risks involved with launching a new business. They are:

• The ability to obtain and comprehend business know-how that normally only materialises through a trial and error basis.

• It provides the franchisee with a group of con-sumers that are already familiar with the prod-uct.

• The other franchisees are an invaluable source of independent information as they face al-most identical challenges and work towards mutual goals.

On the other hand, the cons are:

• Franchisors usually do not scrutinise the quali-ties that a franchisee should have, as their mar-keting departments are often more anxious to sign up new members than to evaluate their business skills.

• Some franchisors have deficient training sys-tems, which impact the performance and suc-cess of the franchisee. The downside here is that this fundamental failure is something that can only be identified after the franchisee has acquired a franchise.

• The franchise faces the same destiny as the chain, therefore the franchisee is also af-fected by negative the public opinion situ-ations caused by other members of the sys-tem and they have few options to solve the problem.

Bowler: There are a number of pros associated with franchising. One advantage is the ability to leverage the brand and quickly open multiple units in multiple ju-risdictions; therefore achieving market penetration and creating significant brand recognition. So long as the reputation of the brand is enhanced by the quality of the franchisee’s business, then franchisors can create a virtuous circle that supports rapid growth. Related to this is the ability to achieve growth in a way that mi-nimises the franchisor’s own capital outlay. Each new franchised unit that opens does so with capital provid-ed by the franchisee. As the franchisor will not need to consider generating sufficient surplus profits, raising capital or borrowing to fund growth, a franchised busi-ness system has the potential to grow at a faster rate than a non-franchised business. Franchising therefore allows franchisors to increase market penetration at a relatively low ongoing cost and with a significantly re-duced level of risk. As a result, major franchisors can have thousands of outlets around the world generating a significant return on investment, as long as the fran-chise system is well run. As the franchisee is respon-sible for the day to day conduct of the business, they will be required to recruit, train, motivate and super-vise their staff, which can be a considerable burden for any business. Nevertheless, the independent nature of a franchised business should ensure that the franchise is both well run and profitable.

There are also a number of cons associated with fran-chising. As franchisees are independent businesses whose priorities and goals may be different from those of the franchisor, the franchisor does not have the same ability to make and influence key decisions as they would with a company owned outlet. The franchisor

has no direct control over the way the franchisee op-erates and represents the franchisor’s brand. The fran-chisor’s only right of recourse against a rogue or un-derperforming franchisee is through the terms of the franchise agreement. Even if the franchisor’s business is profitable, if even one franchisee fails then the brand as a whole could suffer. This means that the franchisor has to keep a close eye on each franchisee to ensure that de-cisions made by one do not adversely impact the busi-ness of another franchisee or the network as a whole. The ability to innovate can also be a stumbling block in any franchising arrangement. If either party comes up with a new development, the franchisee or franchisor may not be eager to implement the product or idea, or may not see the benefit to their business of doing so. Building consensus or imposing improvements to the system within the franchise network both bring their own challenges.

Cheetham: The main advantage, as far as I am con-cerned, is that a brand owner who expands through franchising can usually grow rapidly in a cash flow positive manner which is harder to do when growing conventionally through staff and managed locations. I think it is also beneficial that franchisees are self-em-ployed. This means their work rate and motivation are generally higher than members of staff who have been employed by a company. The downsides are nearly al-ways linked to underperformance when franchisees are demotivated or lack the skills required to grow their locations adequately. In many cases this is due to the franchisor being seduced by a franchise fee rather than having the courage to turn the franchise applica-tion down. Some franchisors, particularly in non-retail environments consider franchising as a process which creates competitors when franchisees don not renew their agreements because certainly in the UK restric-tive covenants are not always easy to enforce.

Some franchisors, particularly in non-retail environments consider

franchising as a process which creates competitors when franchisees don

not renew their agreements because certainly in the UK restrictive covenants

are not always easy to enforce.- Andy Cheetham



Allison: The main body who oversees ethical franchis-ing is the BFA and there are various levels of accredita-tion, namely provisional members, associate members and for established franchisors with a good track re-cord there is full membership. We sign up to a code of practice and go through regular reaccreditations. We have developed an award winning training and support programme to support our diverse network of profes-sionals. During the year they undertake workshops and personal and professional development programmes and many of them are also affiliated to professional bodies within their area of expertise.

Yamaguchi: As of 15 December 1994, Brazilian fran-chising should comply with the rules of Federal Law No. 8,955. There is no official regulatory public body for the regulation of franchising. As mentioned above, the ABF has an important role in the sector.

Carlos: Carlos: In Colombia, there is no specific leg-islation governing franchise agreements. However, considering that franchise agreements usually involve the performance of other contracts regulated by law, such as distribution and trademark licenses, the articles contained in the Commercial Code for these contracts may affect the development of the franchise relation-ship. Applicable trademark law demands that a trade-mark license agreement shall be executed in writing. Therefore, a franchise contract must be in writing to be valid. Colombian legislation requires the registration of a trademark license agreement before the local trade-mark office in order to make the agreement opposable to third parties. This registration is not mandatory for the enforcement of the agreement between the parties, but it is beneficial to carry it out. In case of potential

cancellation actions, the use of trademark registrations provides a level of protection.

In case of potential cancellation actions, the use of trademark registrations provides a level of protection. Bowler: There are no specific regulators or legislations which apply to franchises in the UK. However, general principles of law apply, some of which include a degree of regulatory compliance:

• Data privacy: The Data Protection Act 1998 (“DPA”) as amended by the EU General Data Privacy Regulation which comes into effect in the UK in May 2018 and the impending new Data Protection Act 2017 governs the process-ing of consumer and other personal data col-lected by the parties in connection with the op-eration of the franchise.

• Bribery: the Bribery Act 2010 creates various bribery offences, including section 7 where a commercial organisation fails to prevent brib-ery on its behalf by a person it is associated with.

• Advertising and consumer protection: Any promotions or advertisements should comply with the UK Committee of Advertising Practice Code of Non Broadcast Advertising, Sales Pro-motions and Direct Marketing (“CAP Code”).

• UCTA: The Unfair Contract Terms Act 1977 (“UCTA”) limits the franchisor’s ability to limit and exclude its liability through its standard franchise agreement as any exclusion clause in the franchise agreement will only be valid if they are fair and reasonable.

• Consumer Rights Act 2015: This Act consoli-

dates and updates UK consumer protection law and provides a modern framework of consumer rights which must be considered and complied with in connection with the operation of a fran-chised business.

• Implied Terms: The Sale of Goods Act 1979 (as amended) and the Supply of Goods and Ser-vices Act 1982 (as amended), to the extent that they survive the coming into force of the Con-sumer Rights Act 2015, imply certain terms into contracts. Some of these terms include implied terms in relation to satisfactory quality and fit-ness for purpose of goods sold or services pro-vided.

• Environment Agency CRC Energy Efficiency Scheme: The CRC Energy Efficiency Scheme Order 2010 obliges certain franchisors to par-ticipate in the Carbon Reduction Commitment (“CRC”) scheme and imposes liability on par-ticipating franchisors for failing its franchisees who trade under its control and corporate name.

• Transfer of Undertaking Regulations (2006) (“TUPE”): Where TUPE applies to a transfer of an economic undertaking from one party to an-other, any employment rights will be transferred from the transferor to the transferee. There have been instances where TUPE has been found

to apply to franchising arrangements, and ap-propriate protections (including indemnities) should be included in the franchise agreement where this could apply.

Humphrey: UK franchisors may choose (but are not required) to become members of the BFA, which is the trade body for franchising. Unlike a number of countries throughout the world the UK has no specific franchising laws. Where other countries have specific franchising laws a major part of that legislation places a requirement on franchisors to disclose certain infor-mation to franchisees prior to entering into any fran-chising arrangement. Where franchisors do chose to become BFA members, there is a requirement to com-ply with the BFA’s Code of Ethics. This in turn places a requirement on franchisors to disclose certain infor-mation to franchisees prior to entering into the fran-chise agreement and would include information such as the history of the franchise, details of the manage-ment team, a description of the franchise and financial information relating to the franchise network.

Cheetham: The UK has no disclosure law unlike many other advanced franchise economies so normal busi-ness law applies. This certainly makes UK franchising an attractive market for international franchisors.

2. Who are the main regulators and what legislations apply to franchises in your jurisdiction?



Allison: Auditel is a professional business management franchise, commonly described as a white collar fran-chise, consulting to small, medium and large organ-isations. This sector has grown over the last decade as businesses look to independent trusted advisers for im-partial advice to accelerate growth, improve efficiencies and working practices whilst aligning their cost base to their strategic objectives. In uncertain times it is harder for companies to increase profits and gain a competi-tive advantage. Business leaders are looking for a fresh perspective to help them offer innovative products and services to secure a sustainable future.

Yamaguchi: In Brazil, some of the current popular franchises are:

• Food: Despite Brazilian economic chaos, peo-ple still need to feed themselves. Due to the ef-fect of the crisis, people are seeking meals with a lower average cost. As a result, most popular food franchises have not suffered serious ef-fects. Nevertheless, expansion of franchised businesses has slowed down.

• Educational services – e.g. foreign language schools: Standardised service, teaching meth-ods and attractive costs make customers eager to enrol for such schools instead of single loca-tion ones.

• Hair/nail saloon, spa treatment and other per-sonal care: These are proving to be attractive because replicating a standardised service level brings comfort to the consumer, together with a stronger and more publicised brand.

Carlos: As per the information provided by the Colom-bian Chamber of Franchises, Colfranquicias, currently

the most popular franchises in Colombia are in the ser-vice, hotel, health beauty and kindergarten sectors. Bowler: There are three segments of the franchise mar-ket that are proving popular at the moment, namely food franchises, retail franchises and home services franchises.

Food franchises have traditionally been popular and will continue to lead the way for new entrants in the fran-chise industry. In particular quick service restaurants, cafés and mobile food trucks will continue to expand due to the relative ease at which franchisees are able to learn the business, the profit margin on products such as coffee, and the potential for expansion into a multi-site operation overseas. With consumer demand for even faster service and healthier fast food options, the market place for more diverse or homemade offerings is on the up. Getting the food to the customer in high footfall locations using mobile units certainly seems to be the flavour of the month. In fact, many traditional bricks and mortar operations are now also looking at the use of mobile units.

Retail franchises are another popular franchise due to the ever changing trends within the retail industry, in particular in consumer preferences. The fact that fran-chisees can make money from day one, due to the rela-tive market share of established brands, helps sustain retail franchises at a time when the economy is under-going a significant period of uncertainty.

Finally, home service franchises are becoming in-creasingly popular for a couple of reasons. First, as the youngest members of the “baby boomer” genera-

tion reach their 50s, there is increasing demand for domiciliary care, companion care and assisted living services. Also with the number of people in full time employment increasing, people have less time to carry out household tasks and repairs. Franchisors are rac-ing into this space to provide these home services. The UK has an ageing population, but people are becom-ing increasingly health conscious, so we are seeing the number of franchise systems that seek to address these lifestyle issues increasing dramatically.

Cheetham: Trends come and go and with them, so do franchisors. However, currently we see vehicle leasing and the care sector as the two most popular segments followed closely by what we would term as “second in-come” franchises, which are often low budget invest-ments suitable for the partner of a main earner or as an additional income.

3. What kind of franchise is currently proving popular at the moment, and why?



Germann: The 2017 survey of franchising in New Zea-land was completed by over 160 franchise systems. The results, which were recently published, reveal that New Zealand is the most franchised country per capita in the world, with 631 different franchise systems and 37,000 franchise units. The survey, which was conducted by Massey University Business School of New Zealand and Griffith University’s Asia-Pacific Centre for Fran-chising Excellence of Australia, confirms that the turn-over of the franchise sector has grown strongly since 2012, with the overall turnover being NZ$27.6 billion compared to an equivalent figure in 2012 of NZ$15.0 billion. That is an increase of 84% over five years and it does not include the motor vehicle sales or fuel retail which brings the total to NZ$46.1 billion. The various sectors represented by franchising in order of merit are retail trade (non-food), other services, accommoda-tion and food retail, administration and support ser-vices, rental, hire and real estate services, construction, arts and recreation services, and education and train-ing. During the past five years 185 new brands entered the New Zealand franchising market which means more choice for business buyers. Many people think of franchises as big international brands but the survey showed that 72% of the franchises operating in New Zealand are home-grown companies. Of the remain-der, 17% operate by way of a local master franchisee or licensee, meaning that 89% of franchised brands oper-ating in New Zealand are locally owned and managed. The survey also showed that only 1.9% of franchisees were involved in disputes, and that 49% of all disputes are handled through mediation, not litigation. It is fair to say that franchising is alive, kicking and developing at a very fast rate in New Zealand.

Carlos: Currently the trend is to hold franchise fairs where groups of franchisors jointly present business opportunities. Bowler: The following list details some interesting new trends and strategies that are apparent in the franchise industry:

• Food trucks and other mobile units (often quirky and quite eye catching) are one of the fastest growing businesses. For franchisees it is an easy way to open a business with lower costs. Food trucks also provide a great stream of addi-tional income which works to supplement fran-chisors’ bricks and mortar restaurants.

• Service trucks, like food trucks, are also taking off. These ‘businesses on the move’ keep over-heads as low as possible while offering clients services at their homes, whether it be hair styl-ists, dog grooming, or personal chefs.

• Employee-to-Franchisee is an interesting new strategy that some companies are employ-ing which gives employees the opportunity to purchase a franchise location after working through the chain, whether they choose to do it by proving their worth or completing specified programmes.

• In a similar vein the gig economy, a labour mar-ket characterised by short term contracts, zero hour contracts and freelance work as opposed to workers being employed on a permanent basis, lends itself to service franchises. The gig economy has undergone exponential growth over the last few years and the growth of this part of the economy and a corresponding in-crease in services franchises such as Uber and

Deliveroo, as well as other services with low en-try thresholds, is a trend that is probably here to stay for the foreseeable future. Whether or not it represents a sustainable long term business model is unclear, but franchisors are certainly piling into this sector fast.

• Re-franchising for retailers is becoming a popular strategy employed by franchisors. Re-franchising is where a retailer sells off its corpo-

rately owned stores to franchisees. They may do this to raise funds for the company, to pay down debt or to fund other growth strategies.

Cheetham: Social media activity is something that UK franchisors are spending more time on these days. We have had some success for our clients with this but con-ventional online advertising is still where the action is.

4. Are you noticing any new trends, structures or interesting strategies currently being implemented?



Masih: In the UK there is no statutory disclosure re-quirement. Members of the British Franchise Associa-tion are required to provide each franchisee with a copy of the Association’s Code of Ethics. Increasingly it is ac-cepted as good practice for franchisors to ensure that information regarding the structure of the franchisor’s business and the performance of the franchise network is provided to the franchisee, but great care must be made to ensure that all financial information is accu-rate and based on real life experience rather than mere-ly projections. Regulation is resisted by many within franchising in the UK, but this places a responsibility on the industry to ensure that fair, reasonable and ethi-cal franchise practices become common place and ad-opted by the majority.

Yamaguchi: Pursuant to the Brazilian law, the franchi-sor is, at the very least, bound to present to the franchi-see candidate with the following:

• Franchise offering letter: This is a document that contains a wealth of fundamental informa-tion including a description of the business, the status of the franchise, any applicable rates and payments, the status of the trademark and IP rights and termination provisions and exit con-ditions. The information within the document must be clear and objective.

• Franchise agreement: This is to be present-ed as an exhibit to the franchise offering let-ter, which details all aspects of the franchise.

Carlos: In Colombia, there is no express regulation for disclosures to be made to a franchisee. Nevertheless, article 871 of the Commercial Code establishes that: “contracts shall be executed and implemented in good

faith and, therefore, they enforce not only what is ex-pressly agreed in them but also everything that corre-sponds to the nature of them, according to law custom or natural equity”. This implies that, although, there is no legislation expressly ruling the disclosure require-ments prior to executing a franchise agreement, during its performance or prior to its renewing, the good faith principle points out that the parties must act faithfully and avoid acts that could generate further liability. Un-der this understanding, all potential franchisors must disclose all essential information for the execution, per-formance and renewal of a franchise agreement within a reasonable term before its execution, since this will allow the counterpart to evaluate all advantages and disadvantages of the business opportunity submitted. All amounts and percentages provided to potential franchisees must be supported by reliable information.

Bowler: There are no mandatory legal disclosure re-quirements in relation to franchising in the UK; how-ever, pre-contractual voluntary disclosure is considered to be both good practice and is a requirement of the BFA Code of Ethics. It should be noted that if a franchi-sor decides to make pre-contractual disclosures, they should ensure that any information provided is accu-rate to avoid the risk of falling foul to any misrepre-sentation claims by franchisees. Voluntary pre-contract disclosure is also one of the ways in which franchisors can manage and mitigate the risk of misrepresentation claims from dissatisfied franchisees, so having a robust disclosure process in place becomes an important part of the franchisor’s risk management strategy, and not just a necessary evil that must be complied with in those jurisdictions where disclosure is a legal requirement.

Cheetham: In the UK there are none.

Masih: Franchising covers a range of varied business opportunities, some involve large scale investment while others require a more part time commitment. The potential problem that affects all franchise oppor-tunities is where the reality does not meet the expecta-tions of the franchisees. Franchisors must take care to ensure that all representations and promises made prior to the franchisees committing to the franchise are fair and accurate. In particular all information relating to sales and turnover performance is accurate and capable of withstanding objective scrutiny. Franchisees can be-come quickly disillusioned if their new business ven-ture does not achieve the success they had anticipated, and the first person they tend to blame is the franchi-sor. Claims against franchisors fall into two main cat-egories; breach of contract and/or misrepresentation. Where the franchise agreement has been drafted care-fully, a breach of contract claim is less likely to succeed than a claim for misrepresentation. Misrepresentation will have occurred where a franchisor is held to have either negligently or fraudulently misrepresented the business opportunity and induced franchisees to en-ter into the franchise agreement on information where proves to be untrue.

Yamaguchi: Finding an appropriate franchisee to run the franchise can be difficult. They must be capable of running the business, have the capacity to succeed in the specific type of business, possess the ability to man-age supply and demand, maintain cash flow, properly report the results and motivate the employees. Williams: The new franchisor faces a number of chal-lenges in the UK market currently. One problem is that there are many good quality franchise opportunities available against which they will be competing for inter-

est. The potential franchisee is far more able to research the market when making decisions than ever before. There are multiple channels through which franchisors may offer their proposition and the franchisee investor will be reading magazines, considering social media, viewing the franchisors website and studying a num-ber of franchise recruitment portals as well as attend-ing exhibitions and seminars that will better inform them about how to proceed. The BFA has introduced a qualification for potential franchisees that is free to enter and gives them a much better grounding regard-ing the questions they should ask and the things they should look for. In short, an unprepared new franchi-sor is not likely to make progress in the same way that brands have done previously working in a less open environment. Social media has made such a difference to the way in which a potential franchisee researches their ideal target franchise. They will have done a great deal of background researching and verification before they pick up the phone which means that the new fran-chisor must have a very clean image in every channel, and approach recruiting franchisees just as they would approach developing important new customers. Noth-ing can be left to chance. For these reasons, we strongly recommend a professional, studied and serious devel-opment programme leading to a franchise that can be differentiated from others in the market, and, although young, emphasising its own qualities and USPs.

Carlos: The most frequent problem I have identified is the lack of trademark registration in Colombia. This is an issue to be considered prior to the granting of the franchisee. As per Clause 154 of Decision 486 of 2,000 “The exclusive right to use a trademark will be acquired by its registration at the respective national of-fice”. This, in concordance with Clause 162 of Decision

5. Can you outline the required disclosures that must be made to a franchisee?6. What are the potential problems likely to be encountered when offering franchising opportunities?



486 of 2,000, which states that: “The owner of a regis-tered trademark, or in the process of registration, may license it to one or more third parties for its exploita-tion”, implies that the absence of a trademark registra-tion in Colombia inevitably results in the impossibility to grant a license and constitutes a serious breach to the agreement. This is because the license of the trademark is one of the essential elements of a franchise agreement

and, absence of this means that the franchisee will most likely successfully challenge such absence, terminate the franchise agreement and seek the payment of damages.

Cheetham: The biggest mistakes we see are recruiting poor calibre franchisees or ineffective marketing strat-egies which attract the wrong calibre of attention and lead to a significant waste of budget.

Masih: A prospective franchisee should investigate the opportunity by speaking to existing franchisees and reviewing all available financial information of fran-chisees who are operating the system. Projections pro-vided by the franchisor should be viewed with caution. Confirmation should be obtained from the franchisor that the projections are based on actual operating ex-perience. The evaluation process should include a re-view of the proposed franchise agreement by a lawyer who has experience of franchise agreements and is able to confirm that the agreement complies with ethical franchising practice. The legal obligations imposed by a franchise agreement are wide ranging and it is impor-tant to comprehend the extent of the legal commitment required by the franchisee. Often a prospective franchi-see will be caught up with excitement of the franchi-sor’s marketing activity and forget to ask basic ques-tions, such as what skills will I require to operate the business? What are the financial commitments? Do I understand the obligations of the franchise agreement? Equally important, am I willing to accept restrictions on my activities both during the term of the franchise agreement and once it has come to an end? Time spent investigating the opportunity objectively, will pay divi-dends later.

Allison: I would advise anyone looking at franchising firstly to consider their skill sets and their careers to date and then identify a short list of franchise models which suit their talents and experience. It is a big step to move from employment into self-employment even within the secure environment of franchising. Consider the driving force behind you wanting desire to change career. What do you want to achieve in the future? Think about what businesses would give you the drive and passion to build a successful business. Contact the

BFA who provide excellent guides on how to evaluate a franchise and use this as part of your diligent process. Yamaguchi: The evaluation of the franchise has to be done carefully. A background check, including: the company’s financial status, the existence of any previ-ous demands involving the franchise business or con-flicts between franchisor and franchisees, a reputation-al review, the status of the IP rights and an interview with the franchisees association or other franchisees, are all healthy measures which should be taken to as-sure the seriousness of the franchisor. In addition to the above, the franchises’ documents, such as the franchise offer letter and the draft of the franchising agreement, should also be available for the potential franchisee to evaluate. Seeking out professional advice (both fran-chising consultant as well as legal) to clarify any uncer-tainty in both areas is an important part of the decision making process.

Williams: There are many check lists that can be fol-lowed when researching. An excellent one can be found on the BFA website. In essence, the following will be important:

• Full disclosure documentation in the form of a franchise prospectus and a more detailed offer document will be relevant because they should contain good information about the business’ background, the franchise, the investment, ex-pectations for franchisee and franchisor, terms of renewal, site selection, financial statements, the training and support provided and some-thing about the franchisor’s professional advi-sors. This first document should give a sense of how well prepared the franchisors are.

7. What steps should be taken when evaluating a franchise?



• Check the financial health and track record of the company – partly by whatever disclosure the franchisor will make and partly by research through Companies House.

• Review the companies trading history as a fran-chisor. Are they a member of the BFA? What has been the turn round of franchisees in the last five years? What does social media say? Franchisees will often post comment.

• If a new franchise – what were the results of the pilot operation?

• How many franchisees do they have? The fact that there are only a few should not be a dis-couragement if the franchise operation is well put together, but it is important that the fran-chisor allows the potential franchisee to talk to existing franchisees.

• What is the value, appeal and long term viabil-ity of the product or service of the franchise?

• Does the head office display a commitment to support? What are the full details of the initial training programme and any additional train-ing costs that may be incurred?

• What is the total size of the franchise invest-ment requirement including a realistic example of working capital?

• Is the franchisor willing to offer bank and other references?

• Are there territorial boundaries and exclusivity terms, if not what are the practices for fair dis-tribution among franchisees?

• If there is exclusivity of product supply by con-tract, can that product supply be relied upon and is it at a realistic purchase price? In other words, what is the franchise margin on that product supply?

• What target obligations may be imposed? Is there a realistic franchisee profit and loss to re-view and are the management service fees and marketing contribution realistic?

• What restrictions are there on the franchisee’s operations?

• What assistance does the franchisor provide with launch?

• Are they prepared to provide a sample of the franchise legal agreement – in other words a key point summary?

Any new franchisee should be wary if the franchisor pressurises them in any way, cannot answer questions, is evasive or ignorant of the competition or is a busi-ness with a very similar name to others that are already trading as franchisors. The franchise agreement that the franchisee will sign must cover:

• The description of the exact training and sup-port offered

• Precise prices, commissions and rent fees in-volved

• Precise boundaries of the franchisees territory• Obligations to the franchisor• Rights to renew or extent beyond the original

term• Rights to sell/transfer ownership of franchise• Terms and conditions for terminating the con-

tract• Heirs rights in the event of your death, along-

side arrangements to continue the franchise in the event of the incapacity of you the franchisee

Carlos: The franchise should begin by:• Requesting confidential and objective opinions

by current franchisors regarding the franchise they have acquired.

• Requesting audited financial reports of the whole chain (not just some branches).

• Requesting projections of growth of the eco-nomic sector of the franchise.

• Asking yourself if your interests are in line with the activities carried out by the franchise you intend to acquire.

Cheetham: The advice we always give to potential fran-chise owners is to ensure that the franchise they go for allows them to use their existing personal skill set and experience. It does not have to be sector specific experi-ence, just experience that helps you in the new role. For example, if you are going for a sales role and you are a shrinking violet then you will probably fail no matter how good the franchise is.



Germann: Local franchising in New Zealand is very active. A number of well-known brands include Bed-post, BurgerFuel, Cleantastic, Columbus Coffee, Hol-lywood Bakery Espresso, Mexicali Fresh, New Zealand Natural Ice Cream, Paper Plus and The Coffee Club. International franchising can mean New Zealand sys-tems going offshore and offshore systems coming into New Zealand. Two New Zealand systems which have gone offshore and are very successful are Esquires Cof-fee and BurgerFuel. When an overseas system enters New Zealand it can do so by way of direct franchising where the overseas franchisor enters into unit franchise agreements with franchisees in New Zealand, by mas-ter franchising where an overseas franchisor appoints a New Zealand company to be the master franchisee for New Zealand, or by a bit of both using area develop-ment where area developer franchisees are licensed to develop large territories with scope for multiple units. It is wise for a franchisor to establish its own operation directly owned and operated which is known as a com-pany-owned operation. Another method is by way of joint venture, where a franchisor enters into a joint ven-ture with another party, but in this instance great care must be taken. Whatever method is chosen, it should be followed and robust documentation should be put in place. International franchising is much harder because a franchisor is relying upon third parties to protect its brand and develop its system, so great care must always be taken in selecting and choosing the right master franchisee.

Williams: If one is looking at an international franchise then it would be sensible to have first established a pilot operation in the market to ensure that the concept and its methodology fits with UK consumer expectations.

If one is acquiring a master franchise or area develop-ment rights from an international franchisor, then the following will be relevant:

• Is this a first international expansion?• What market research have they done to give

confidence that their opportunity will work in the marketplace?

• What challenges could there be around product or equipment supply?

• What support truly can the franchisor offer?• Is the franchisor, realistically, looking for a large

upfront sum but not then going to be willing to commit to supporting and developing the candidate as a franchisee? Ideally a good in-ternational franchisor will look for a realistic investment initially but not one that effectively absorbs all the capital of the investor, leaving the investor underfunded. Rather they should seek an adequate initial upfront payment and ensure that the franchisee has funds to prop-erly develop their first trial operations and then promote and expand the business and recruit franchisees.

• The legal agreement will be based on the coun-try in which the brand originated, it is important to read this carefully to ensure that it will work. The franchisor may require the master franchi-see to write their own sub-franchise agreement which should be effective under UK law.

• Have they obtained the UK trademark?

Carlos: The evaluation does not differ much. I believe that the process of evaluating an international franchise can be made more difficult for the franchisor as they

must demonstrate that the product or service of the franchise has a market in the new country.

Cheetham: This is mostly dependant on whether an in-ternational franchise has proven it can work in the tar-get country. If a new franchisee is running the country’s pilot franchise then there is a very large risk. Business

models are transportable across continents but it’s of-ten the culture that leads to underperformance or fail-ure. Local franchise evaluation is a lot easier because if it works in a demographic similar to your own then there is a high likelihood it’ll work in yours, provided of course the franchisee has the necessary qualities and budget to replicate the model.

8. How does this differ depending upon whether you are evaluating a local or international franchise?



Masih: The Franchise Agreement should clearly set out the rights and obligations of both franchisor and fran-chisee. Typically, the obligations on the part of the fran-chisee are more extensive than those on the part of the franchisor. The franchisor should grant the franchisee the rights to use the franchisor’s intellectual property and business know-how. If the franchisee will be oper-ating in a territory then the agreement should clearly state whether the grant of rights within the territory are exclusive or non-exclusive. The franchisee should have a right to renew the franchise agreement at the end of the initial franchise term, subject to satisfying cer-tain conditions. The Franchisee should have a right to sell the franchise, provided that certain conditions are met and the prospective purchaser is approved by the franchisor. The termination provisions should be clear and unambiguous and the agreement should contain specific provisions setting out the conditions that will apply upon termination and clearly drafted post-termi-nation restrictions applying to both the franchisee and the guarantor (if any). Depending on the business sys-tem being franchised the franchisee may be required to purchase certain products or services exclusively from the franchisor or nominated suppliers approved by the franchisor; again, depending on the business system being franchised there may be provisions requiring the franchisees’ involvement in national or key accounts. The payment of fees is an important part of the agree-ment. The franchisor should ensure that all fees and payments are set out clearly including payment of man-agement services fees and any other ongoing fees.

Franchise agreements typically include a number of schedules which will set out information specific to the franchisee such as the extent of the allotted territory,

the term of the agreement, the commencement date, the initial franchise fee and other fees payable on com-mencement of the franchise, including training fees and fees to pay for specified equipment and marketing materials.

Before entering into the agreement independent legal advice from a lawyer experienced in franchising should be obtained to review and confirm the contents of the franchise agreement.

Germann: The rights and obligations of the franchisor and franchisee should be carefully set out in the fran-chise agreement. The franchisor’s obligations are easy – to promote and protect the brand, to publish robust manuals which should be updated on a regular basis, to provide marketing advice, to train new franchisees, to provide ongoing training, and to support franchi-sees in relation to the franchise system. The obliga-tions of franchisees are extensive and they will include promotion of the franchised business, to operate the business as an independent proprietor, to pay all fees due and payable to the franchisor which include the up-front franchise fee and ongoing royalty and adver-tising amounts, not to prejudice the intellectual prop-erty of the franchisor, to maintain high standards in relation to the conduct of the business, to follow the manuals, to preserve the secrecy and confidentiality of the franchise system and every aspect of it and to meet any minimum performance objectives imposed by the franchisor. Franchisees must also be very careful to follow all health and safety requirements and com-ply with all relevant laws. Further, in many franchise agreements there are now obligations of good faith whereby each party must act loyally and faithfully to-

wards the other. I am in favour of good faith practice. It is also essential for both parties to agree to a dispute resolution process in relation to any disputes which cannot be resolved and the most favoured and suc-cessful process in New Zealand is by way of mediation.

Yamaguchi: Besides the carefully drafted franchise of-fer, the main concern is the termination proceedings. By this, I mean that the agreement should determine what the franchisee is or is not entitled to receive at ter-mination of the franchise. In this sense, the franchise agreement must contain, at least:

• Termination conditions • Non-compete: activities, territory, industry• Non-solicit of suppliers and franchisor person-

nel• Return of confidential information• No assignment of IP rights, know-how, formu-

las, recipes

Carlos: The following clauses should be included in any franchise agreement:

• Scope of the agreement • Definitions • Territory

• Term • Documents to be delivered • Initial franchise fees and payments• Other fees • Payment procedures • Taxes • Obligations of the Franchisor • Obligations of the Franchisee • Trademarks, service marks, trade names and

logotypes • Patents and copyrights • Restrictions on foods and services offered by

the Franchisee • Renewal, termination, repurchase, modifica-

tion and assignment of the agreement • Publicity and marketing • Sub-franchising dispositions • Audit rights over the Franchisor by the Fran-

chisee • Breach of the terms of agreement • How communications among the parties should

be conducted • Indemnification • Applicable law • Dispute resolution

9. What should be included in a well-drafted franchise agreement?

The obligations of franchisees are extensive and they will include promotion of the franchised

business, to operate the business as an independent proprietor, to pay all fees due and payable to the

franchisor which include the up-front franchise fee and ongoing royalty and advertising amounts...

- Paulo Yamaguchi



Bowler: The following should be included in a well-drafted franchise agreement:

• Fees: Fees should be specified, as should the manner and timing of payment.

• Rights granted to the franchisee: The franchisee may be given the right to exercise rights related to trademarks, brand image and design, trade secrets and copyright material, to name a few.

• Geographic grant of rights: The extent of the territory being allocated to the franchisee and whether the territory is awarded to the fran-chise on an exclusive or non-exclusive basis.

• Length of the agreement: The BFA Code of Eth-ics provides that the “duration of the agreement […] should be long enough to allow the indi-vidual franchisee to amortise his initial fran-chise investment”.

• Continuing obligations: These obligations gov-ern the continuing relationship which exists af-ter the franchisee has opened their business. For a franchisee this may include the obligation to carry on the franchised business and no other business from the upon approved premises, to observe certain minimum opening times, and to follow accounting and reporting systems laid down by the franchisor.

• Sale of business/death of franchisee: The issue of what should be done in the event of death of the franchisee, or the principal shareholder of the franchisee if it is a company, should be dealt with, either through an assignment to the franchisee’s or principal shareholder’s personal representatives and/or dependents, or through a sale of the franchised business at an appropri-ate price.

• Dispute resolution: As with any contract this clause will be crucial in the event of dispute between the parties. Alternative dispute reso-lution is encouraged as an alternative to court proceedings and the BFA operates its own me-diation and arbitration scheme to resolve fran-chising disputes. The BFA is currently working on the rules for a mandatory arbitration scheme which will be a condition for BFA membership going forward.

• Termination provisions and consequences of termination: The agreement may be terminated in a variety of ways, which should be specified. For example, the franchisor may seek to include a provision which relates to termination follow-ing a breach of the agreement upon the service of a notice. If this is included, then there should also be a provision which allows the franchisee to be given an opportunity to remedy any de-faults which can be remedied within a specific period.

Humphrey: The franchise agreement will contain a number of key aspects. It will set out what rights are being granted to a franchisee, namely whether they are being given the rights to operate from particular prem-ises or within a territory and where they are operating within a territory; and whether they have the exclusive or non-exclusive rights to operate in the territory. It will also confirm how long the franchise is to last for and will normally contain a right of renewal in favour of the franchisee at the end of the initial term. This is sub-ject to a number of conditions, including: the franchi-see having complied with the franchise agreement, the franchisee being required to undergo further training,

or the franchisee being required to replace or update any equipment or refurbish any premises from which it operates. The franchise agreement will set out the obli-gations of both the franchisor and the franchisee; with the franchisee’s obligations being more extensive given the franchisor is looking to use the franchise agreement to control how business is conducted under its brand. There will be extensive references to the manual within these provisions, placing obligations on the franchisee to comply with all aspects of the manual. There will be a right for the franchisee to sell its business to a third par-ty and to reap the rewards of building up the business.

The franchise agreement will also set out the circum-stances under which it can be brought to an end prior to the agreed term and what is to happen on termina-tion or expiry of the franchise agreement. It will also normally contain a right for the franchisor to acquire the franchisee’s business.

Cheetham: A lawyer will usually want more content. A recruiter recognises that more content can be a barrier to recruitment so they tend to favour agreements which are not too voluminous.



Masih: Franchise agreements typically contain restric-tions on the franchisee and the guarantors’ business activities, both during the term of the franchise agree-ment and for a period of time after the end of the agree-ment. The restrictions on activities during the term will include not being involved in a competing business and an obligation to devote full time and attention to the franchise business. The restrictions after the expiry of the franchise agreement will restrict the franchisee and the guarantor from being involved in a competing business, from soliciting clients of the former franchise business for the benefit of a third party and from en-couraging employees to work for a competitor. It is im-portant that the restrictions are drafted carefully to en-sure that they will be enforceable and upheld by a court. The Franchisor will want to protect the know-how and information that is unique to their business system and

ensuring that only those franchisees that have a current licence to use the system is important to maintain the credibility of the brand and network.

Carlos: Usually, franchise agreements include the fol-lowing restrictions:

• Non-competition in the territory • Confidentiality • Provisions for the change of control on the fran-

chisee • Employment policies

Cheetham: This is too long an answer to outline in a roundtable as the restrictions cover everything the franchisee can and cannot do with the brand and the business model. Most agreements also contain market sector and geographical restrictions.

10. What restrictions are typically set out in franchise agreements?

Masih: As a franchisor the main consideration is to re-tain control of the franchise business and ensure that the franchisee does not take valuable know-how out of the franchise network without permission. Thought will also have to be given to ensure continuity of service for customers either by the recruitment of a replace-ment franchisee or by the franchisor being able to step-in and continue the service provision until such time as the new franchisee can be recruited. The franchise agreement will usually contain fairly extensive provi-sions setting out the conditions that apply following termination and the restrictions on post agreement competing activities. Thought should be given to the practical steps to be taken by all the parties and rely-ing on boilerplate clauses will not always provide the answer. This is one of the reasons why instructing a so-licitor experienced in franchising will be invaluable to ensure that the franchise agreement accurately reflects the commercial requirements of the franchisor’s busi-ness model both during and after the term of the fran-chise agreement.

Germann: The worst thing to happen to any franchi-see is for a franchise agreement to be terminated before the end of the term. For such termination to be legal it must follow a breach of a covenant by a franchisee. Usually a notice of breach of franchise agreement will have been prepared and served upon a franchisee and if the breach is not remedied then the franchise agree-ment can be terminated. Franchise agreements can also terminate or expire through the effluxion of time. For example, a franchise agreement which is for a term of five years with one right of renewal of five years will ex-pire at the end of the 10 year period if no further rights of renewal have been agreed. When a franchise agree-

ment expires, the post-termination covenants lock in, including protection of intellectual property and re-straint on competition by the franchisee. It is essential for the franchisee and the directors of the franchisee company to be restrained from operating any business similar to or in competition with the franchised busi-ness after termination of the franchise agreement and such restraint will normally last at least two years and cover a defined territory. The courts in New Zealand do not like restraints of trade per se but they will enforce them in the franchising area because the courts under-stand the value of intellectual property. It is very impor-tant for the termination provisions in franchise agree-ments to be carefully drafted by lawyers experienced in franchising and proper processes must be followed. If a franchisor wrongfully terminates a franchise agree-ment then the termination may be held to be unlawful and a court may order the re-constitution of the fran-chise agreement, with resultant damages payable by the franchisor for wrongful termination. This area can be a minefield so great care must be taken at all times.

Carlos: Any harm to the reputation of the franchise’s trademarks must be avoided. The termination of a fran-chise agreement must be followed by an intense PR work. Humphrey: There are clauses within a franchise agree-ment which set out what will happen on termination of it. These will usually include provisions requiring the franchisee to cease operating its business and using the brand name. A franchisee would also be required to re-turn the manuals and any equipment that a franchisor has loaned to it and assign to the franchisor the benefit of any ongoing customer contracts. In addition there will be an option for the franchisor to acquire the fran-

11. What are the main considerations following the termination of a franchise agreement?

The Franchisor will want to protect the know-how and information that is unique to their business system and ensuring that only those franchisees that have a current licence

to use the system is important to maintain the credibility of the brand and network.

- Jane Masih



chisee’s business at an agreed value or by following an agreed mechanism for determining the value.

In essence the franchisor needs to decide whether it simply wants the business operated by the terminated franchisee to cease or whether it wishes to step into that franchise to continue operating it (either directly or through other franchisees).

Where the franchise is premises based, as in the case of food and beverage or retail franchises, then the franchi-sor needs to consider at the outset how it wishes to deal with the ex-franchisees property. On termination, in the absence of any more formal arrangements, the fran-chisor will need to negotiate with the landlord to obtain the landlord’s consent to take over the lease of the prop-erty, if it wishes to continue to trade from that premises. To avoid such uncertainties a franchisor might either consider at the outset either, taking a head lease of the property and sub-letting the premises to the franchisee, or consider obtaining from the landlord step-in rights, which would give the franchisor the right to take over the lease in the event of termination of the franchise agreement.

In the case of non-premises based franchises it is im-perative that the franchisor has as much information as possible about the franchisees’ business including details of its customers or clients and the work that it is being undertaken so that in the event of termination of the franchise agreement it can simply step in and take over the franchisee’s business, without the co-operation of the franchisee. In this regard, if the franchisor has a centralised customer relationship management system and finance system then it is going to be much easier for the franchisor to do this.

Cheetham: For the franchisor it is important to consid-er the prospect of the franchisee continuing without the franchise brand and potentially competing with other franchisees. How a termination is handled depends on what the franchisee intends to do, or will warrant to do, or what the franchisor accepts they are likely to do after the termination. Protecting the network, its cus-tomers and the likelihood of upholding the restrictive covenants are the key elements to worry about.

Allison: Franchising provides those who want to be-come self-employed with a secure business opportunity and a framework to build a business. The most impor-tant aspect of any business start-up has to be sales and marketing activity to build up a customer and client base. In order to achieve their financial goals, regular business reviews need to be conducted to make sure the franchise is on track. Franchisors have dedicated busi-ness development managers and professional marketers to provide support in this start-up phase and the most successful franchisees follow their advice implicitly. At-tending all scheduled meetings and training courses in order to build up confidence and competency in a new profession is important too, as it accelerates the learn-ing curve.

Williams: Any new franchisee, like a new pupil start-ing at school, has a steep learning curve ahead of them. One hopes however, that the franchisee will be very well supported by their franchisor in order to make the journey as painless as possible. However it would be a mistake for any franchisee to think that the pro-cess is going to be simple. In essence they are starting up a virgin business in a new market place that they are probably unfamiliar with, and so everything they do for the first time, should be executed with their training in mind. They will incur knockbacks and they will potentially find being in business by themselves a lonelier world than the one that they were previously in. They will need the support of their partner at home and the understanding of their extended family while they tackle this terrific opportunity that they have in-vested money in. I believe they should concentrate on the following:

• Becoming familiar and comfortable with prov-ing the product, service or experience that is the offer to the customer.

• Being proactive in marketing following all the advice, guidance and recommendations of their franchisor and not skimping the recommended budget spend.

• Establishing a good reputation for service and quality from the beginning.

• Paying attention to cash flow, and profitability. Financial awareness is crucial in the first year of a business.

• Embracing the advice and guidance of more ex-perienced fellow franchisees.

• Taking time out for personal refreshment rather than burning themselves out, but at the same time giving their all.

• Understanding that not everything they try will work; they should not be disheartened.

• Becoming aware of potential competitors, whether franchisors or standalone business, in their local area and consider how best to achieve progress against them.

Carlos: The training of the personnel and the prudent management of costs.

Cheetham: In typical owner-operator franchise for-mats, which are where I spend most of my time, the fo-cus needs to be on getting into a positive cash flow posi-tion each month as fast as possible. This means soaking up the training and support available and attacking the business with real vigour. Once your overheads are be-low your margin you are bullet proof!

12. What are the most important tasks franchisees should prioritise during that crucial first year?In essence the franchisor needs to decide

whether it simply wants the business operated by the terminated franchisee to

cease or whether it wishes to step into that franchise to continue operating it (either

directly or through other franchisees). - Damian Humphrey



Allison: Many candidates ask what the attributes of our most successful franchisees are. The want to know whether or not we feel they have the right skill sets to be successful, what they can expect to earn over the course of their franchise and if it is worth the investment. They also want to know how they will build their client or cus-tomer bases and what support will they will be given? A number of franchisees may self-fund their new busi-nesses; however many of these franchisees want to un-derstand the finance options available from the major clearing banks that support franchising.

Germann: When a business owner wishes to establish and form a franchise there are many important consider-ations. The existing business should have a track record of at least two years or more, in my opinion. A person should only go down the franchising route if the busi-ness is profitable, has strong management experience, can easily be taught to third parties and has some unique features. An important feature is an effective and catchy name which must be protected by registered trade mark. The franchisor must set up a robust training program and the franchise system must be capable of network support. A franchisor must be sufficiently resourced, both from a labour point of view and money in the bank, as franchising is not a cheap option if it is done properly. It is important for any franchisor to have a good relation-ship with its bank which can play an important part down the track by providing some funding to franchisees. A potential franchisor must obtain independent legal and accounting advice from experienced practitioners in the area. I usually recommend that the intellectual property is owned by one company which gives a licence agree-ment to the franchisor company to use the intellectual property and the trade marks in return for payment of

a licence fee. The franchisor company would then enter into franchise agreements with third party franchisees. If the franchisor is not well capitalised then the franchising proposal should be put on hold as it is very important not to run out of money during the development stage.

Yamaguchi: This falls under four categories;• Initial investment: One of the most necessary

questions relates to a franchise’s initial fees, including costs for infrastructure, purchase of initial inventory, regular purchases of raw ma-terials, marketing and marketing cost sharing.

• Working capital: In addition to the initial fees, it is important to consider the allocation of the available funds after the initial investment. A lack of experience when conducting the busi-ness can result in reduced working capital for daily operations. This is considered as the main reason for termination of franchisees.

• Support: It is important that the franchisee is entitled to and is guaranteed support from the franchisor.

• Penalties: It is important to lay out penalties and indemnification provisions for breach of obligations in the franchise agreement. In spe-cific Brazilian cases, it is very hard to find proof of a breach and to prove you are entitled to in-demnification. For that reason, most penalties are non-compensatory.

Carlos: The most frequent questions are:• What kind of franchise am I going to have?• Am I going to be an exclusive franchisee?• Over which territory is the franchisor granting

me rights?

• Which is the royalty scheme of the franchise?• Is there any estimate on how much money will I

receive after one year?• Are there any demonstrated results from previ-

ous years of the franchise?• What information and know-how will be pro-

vided by the franchisee without and additional value?

• What are the renewal policies?

Cheetham: The most common questions for us are ex-actly how does the business work, where are customers gained from, what is included, what is the training and how much money can I make?

13. What are the most frequent questions people ask before proceeding with a franchise?