Franchise clinic summer 2008

Elise Billy is founder of Franchise Generator and EXB Legal, a specialist franchise consultancy and law firm respectively. Prior to founding her specialist firms, Elise worked at major city law firms and international businesses and has direct commercial experience from running internet and consultancy businesses

(Q)We have been considering setting up an internet based extranet for use by our franchisees, do you have any guidance on that and the pros and cons?
(A)As the network grows, an internet based extranet is something considered by many franchisors.The answer will usually be found by doing a cost and benefit analysis. An extranet can bring considerable benefits including increasing the speed and ease with which you can update franchisees. They can then access central materials, which provide a strong sense of being part of a network as well as centrally controlled communication and access to software.
Depending on the nature of your business, a central extranet could be used to access any bespoke software, central server and/or database, ordering supplies, accessing templates and marketing materials, accessing centrally negotiated purchase or leasing deals, reading newsletters, accessing the manual and any guidelines and policies, sending revenue and other reports, submission of review forms, access to information about meetings, training and conferences, and access to a network message board or forum
There can be considerable costs and time involved in the set-up of the extranet, and you need to make sure that it is secure, reliable and kept updated. On an ongoing basis, further time and costs will be involved in maintaining, hosting and updating the extranet. Security can be an issue, and in particular you would need to consider whether franchisees should be able to download your copyright material (such as the manual). If the extranet will be a static site, or simply lead to access to a message board or forum, then you may find that after initial enthusiasm, its use dwindles and your costs may have been incurred for no reason.  
I suggest that you carefully draw up your specification and requirements before commitment. If the extranet is a dynamic environment or gateway to most items, services and communication needed by  franchisees, then it may become an essential daily business tool worthy of the investment, ultimately cutting costs and time in the long term. It can create a knowledge community in the network and provide a strong part of franchisee support that will remind your franchisees of the benefits of being part of your network.

Stuart Walsh is Managing Director of Franchise Finance, which provides lease finance for franchisees. Prior to Franchise Finance, Stuart held a number of UK and international roles with GE Capital over a 12-year period

(Q)How much assistance should I give my franchisees in sourcing finance to buy into my franchise?
(A)Franchisors are constantly faced with the dilemma of how involved should they be in various aspects of the franchisees activity. If you do too little, they may not achieve what you want them to achieve or they might argue that you are not adding value. If you do too much, they may become reliant on you or worse still, they could blame you if things don’t go as planned.
When it comes to raising finance you will have probably invested a considerable amount of time and resources in recruiting your franchisee and if they fail to get the finance they need, your investment is lost.
It is worth doing some preliminary checks in the initial stages, such as inquiring about their assets and liabilities, how they expect to finance the franchise and what the source of this investment will be. This is easily achieved by including the questions on your application form. Do make sure you ask about their credit history! This is where financing invariably falls down, especially when a simple credit search reveals a CCJ (County Court Judgement), several missed mortgage payments or large credit card debts, that will impact upon their ability to raise finance.
A business plan is needed to obtain finance and this is often the most complicated area. If you produce the plan, it becomes yours and not the franchisees and if they do not succeed, they might blame you. If you leave the franchisee to their own devices, the plan they produce may be inadequate to successfully obtain finance.
You could use a professional business plan service that will take instructions direct from the franchisee, but will also talk to the franchisor to obtain information. This way you end up with a professional business plan that is more likely to succeed in raising finance, which includes all the relevant information you want to see while at the same time, leaving the ownership directly with the franchisee.

Craig Kitchen is a director at Barnett & Barnett and has 24 years’ insurance broking experience. Barnett & Barnett provide specialist insurance and risk management services to the franchise sector

(Q)How will I benefit from a franchisee insurance scheme?
(A)There are several reasons why it is extremely important that a franchisor has the ability to monitor the insurance purchased by their franchisees and also to ensure that the cover is regularly reviewed and policies are renewed.

In the event of a franchisee suffering a loss, which is either not covered or it is discovered that the insurance arranged is inadequate, this can impact severely on a franchisor’s earnings, ie, no sales, no royalty income, management fees, etc. Whilst a franchise agreement may make the franchisee responsible for the continued payment of these amounts, the reality is that it is unlikely the franchisee will have the financial ability to meet those commitments without the protection of insurance.

More importantly perhaps, in our view, it is an absolute necessity that the franchisee put insurances into place to protect the brand of the franchisor.

It is not clear, legally, how far your vicarious liability would extend, with regards to the actions of your franchisee, but certainly experience shows that in the event of a claim, third parties, employees, etc, see the brand as the company rather than the individual franchise operator.

There is also the potential for adverse publicity following such an incident where there may be no insurance or inadequate cover in place!

By setting up an insurance scheme for your franchisees, not only will you address these issues, but also be seen to be providing a ‘good deal’ for your franchisees in respect of their insurance requirements. Scheme arrangements are able to provide wider and more tailor-made protection for the operation and with the usual ‘bulk purchase’ scenario, this should result in competitive premiums for the franchisees.

With a scheme in place you will be secure in the knowledge that your franchisees are adequately protected and that they continue with their insurances on a year by year basis. Remember it is your image and business that you are protecting, whilst at the same time your franchisee will also benefit.

Nicola Broadhurst heads up the franchise team at Mundays LLP and specialises in franchising, advising both franchisors and franchisees on all aspects of franchising from inception through to establishment of a franchise business.

(Q)Can I stop my franchisee advertising or selling products at lower prices than the recommended retail price?
(A)This is often asked by franchisors and the short answer is ‘no’, not unless you want to risk falling foul of the relevant competition legislation. In the UK this would be Chapter 1 of the Competition Act 1998 within the UK, which applies the European block exemption on vertical agreements (such as franchise agreements).
The block exemption and therefore the Competition Act specifically prohibit any attempt by a supplier to fix prices. A supplier, however, is permitted to fix a maximum price or recommended sale price provided this does not result in practice to a fixed or minimum price due to any pressure or incentives.
In franchises where a franchisee is required to purchase products from the franchisor or approved suppliers, the franchisee must be free to sell below the price recommended or set as a maximum by the franchisor. A statement in the franchise agreement that a franchisee is free to sell at whatever prices it wishes is not sufficient if this is not followed in practice. An indirect attempt to impose prices would also be caught.
This is borne out in the examples cited by the Office of Fair Trading of the types of practice that it considers may result in fixed or minimum sale prices and would therefore be in breach of the Competition Act. These include not only an agreement fixing the maximum level of discount that a distributor (or in this case a franchisee) can grant from a prescribed price level but any indirect attempt to fix prices by intimidation, delay or suspension of deliveries and contract terminations.
On this basis any attempt by a franchisor to prevent a franchisee from advertising a discount is likely to be considered as an indirect attempt to fix a recommended retail selling price.

If a franchisor is found to have breached the Competition Act it could result in the franchisor facing a substantial fine of up to 10 per cent of worldwide group turnover together with extremely unwelcome publicity. In addition the franchise agreement containing the restriction (or the relevant provision, if it is capable of being severed from the agreement) will be void and unenforceable.