Franchising your business: choosing the franchisor company

Your business is running successfully and you want to expand through franchising. Before offering a contract, there is an important decision to make: which company will act as the franchisor? Using your existing company or creating a dedicated entity affects how resources, responsibilities and financial flows are organised. The aim is not to build a sophisticated corporate structure, but to give your franchise network a partner capable of meeting its commitments.

1. Compare two structures without assuming either is best

The company that operates your outlet can also act as the franchisor. This brings operational experience, staff and franchise contracts together within a single legal entity. It may suit a gradual launch where resources remain largely shared.

The trade-off is that the outlet’s financial results and those of the franchisor activity sit within the same company. Cost accounting can help distinguish their respective costs and avoid confusing the profitability of the outlet with the ability to support franchisees.

A dedicated company makes it easier to identify the network management activity, its resources and its commitments. It may also make it easier to bring in shareholders later for that activity alone. However, it creates additional costs and arrangements to manage, such as internal services, access to resources, trade mark rights and funding.

Creating a new company is neither a specific requirement of franchising nor an absolute safeguard against risk. Guarantees given, contractual commitments and the way the business actually operates remain decisive.

2. Ensure the franchisor has access to the right resources

The contract should not promise services that only another company can provide unless suitable arrangements are in place. Before choosing your structure, draw up a simple resource map:

• Which company owns, or can license, the necessary trade mark rights?
• Where are the people who will provide training and support employed?
• Who will fund the development of shared tools?
• Which entity owns the equipment and materials used?
• Who will invoice franchisees and pay service providers?

If several companies are involved, formalise their relationships. A franchisor company using a trade mark owned by another entity must hold rights that allow it to grant the relevant permissions to franchisees. Similarly, shared teams require coherent legal, employment and financial arrangements.

Have your advisers review the proposed agreements. An established way of working between companies under the same management is no substitute for documented commitments.

3. Clearly identify the actual contracting company

In France, franchise agreements are governed in particular by general contract law and competition law. There are also specific pre-contractual disclosure rules, which apply beyond franchising alone.

Article L. 330-3 of the French Commercial Code, introduced by the law of 31 December 1989 known as the Doubin Law, applies where a party makes a trade name, trade mark or trading sign available while requiring an exclusive or near-exclusive commitment in relation to the business activity. In these circumstances, the pre-contractual disclosure document, known in France as the DIP (document d’information précontractuelle), and the draft agreement must be provided at least twenty days before the agreement is signed or any payment required before signing is made. Article R. 330-1 specifies the contents of the DIP.

The choice of franchisor company must therefore be settled early enough. Its identity, history and financial information must be presented without confusing them with those of another group company.

If you create a new entity, clearly distinguish how long it has existed from how long the pilot outlet has been operating. Explain the links between the entities and ask a lawyer to establish how to meet the disclosure obligations given the company’s recent formation. The founder’s experience must not be presented as the new company’s accounting history.

4. Check that the structure can operate from day one

A legally incorporated company is not necessarily ready to become a franchisor. Prepare a budget specifically for this activity, covering professional advice, insurance, staff, travel, tools and expenditure incurred before the first franchise outlets open.

Identify who will fund these needs and in what form. If the existing business advances funds or provides services, have these arrangements documented and their accounting and tax implications checked. Do not assume that the first initial franchise fees will cover all the commitments you have made.

Before any agreement is signed, compile a file for final review: a corporate structure chart, an allocation of resources, internal agreements, a start-up budget and confirmation of the party named in every document intended for prospective franchisees.

Key takeaway: choose the franchisor company according to the resources it can genuinely draw on. A simple, funded and documented arrangement is better than a dedicated entity that cannot fulfil its contracts.