Pilot Franchises – What you need to know

Pilot franchises – rocketing to the moon or fizzling back down to earth? November is the month for fireworks and we look at what you need to know about pilot franchises.

The risks of pilot franchises

Like the lighting of your first firework on bonfire night you never quite know whether a pilot franchise will turn out to be beyond your best expectations, a slow burner, or simply fizzle out before it really gets going.

The element of risk with a pilot franchise is higher than your average franchise. After all it will be a business which is untried and untested as a franchise system. It may have been running successfully as an independently owned business for many years but that does not mean that the business and the proposed franchisor will adapt to franchising.

Reason for pilot operations

Businesses generally pilot their business model to see whether it will work as a franchise set up before franchising it. Not all franchisors recruit pilot franchisees to run the pilot operation. They will often use one of their own company owned outlets but run it as if it were an independent franchisee.

Pilot franchises are the “guinea pig”. They allow the franchisor to test it out, fine tune the business method and system and see what, if anything, needs to changed, improved or further considered before the system is properly franchised.

It also gives the proposed franchisor and those running it the chance to see whether franchising is for them or not. There are many considerations to take account of when a business is deciding to franchise, such as territories and locations, the type of franchisee they want to have on board, what support, training and guidance they will have to provide, marketing methods and how the brand, standards and goodwill will be maintained across a much larger network of businesses.

It should be viewed as a learning opportunity for both the pilot franchisee and the franchisor. There will need to be much closer discussion between the two as to what is working, what is not and how to overcome any short comings.

Reward and probably a bit more risk

The fact that the pilot franchisee will often be closely involved with the franchisor in ironing out any issues does not mean they will not have strict obligations to the franchisor and be subject to the terms of a franchise agreement like any other franchisee. They will.

However, the pilot franchisee has a chance to negotiate these initial pilot agreement terms much more strongly than any other franchisee who is signing up to a tried and tested franchise.

Pilot franchisees must be aware that pilot franchises are often for one year or two, in comparison to a full five year franchise. At the end of the term of the pilot agreement if the franchisor decides to continue franchising and agrees to offer the pilot franchisee a full franchise agreement (which is usually discretionary) the full franchise agreement terms will very much be “up for grabs” again.

The pilot franchisee will usually be sent a full franchise agreement – probably on the then standard terms of the franchise agreement and it is likely to look very different to the terms of the pilot agreement.

The franchisor is also likely to want to retain the pilot franchisee who, by this time, has knowledge of the system and can assist with the welcoming of new franchisees. However, the negotiating position with regards to the terms of the full franchise agreement may not be as strong for the franchisee, especially if the business has proved to franchise well and has resulted in a good business.

As with all commercial contracts the terms are negotiable. How much so will largely depend on how much bargaining power the parties have. A franchisor with a good business model that has piloted well and a franchisee who does not want to lose the business they have spent a year or two developing means that the franchisee may not have the same bargaining power as they had pre-pilot.

On the other hand, if the pilot business hasn’t worked out as well as it was hoped, the franchisee may decide to cut their losses after the expiry of the pilot franchise. In this scenario the hope is that as a result of initial negotiations the initial fee was relatively small.

Find Out More

If you are involved in, or considering, a pilot franchise contact our Franchise Department who will be happy to discuss your agreement.

Support & Networking Group

If you are a franchisee please join our newly launched Franchisee Support & Networking Group, aimed specifically at franchisees looking for ideas, support and help on any issues. The event will be hosted by Amy and leading franchise barrister Paul Strelitz from Hardwicke. Click here to find out more.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as at November 2015.