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.

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Dishonesty in divorce no longer tolerated

What can you do if you suspect your spouse concealed some of their assets during your divorce in order to reduce the amount they had to pay you?

When a couple divorce, there is a complex procedure known as disclosure. Both spouses have to sign a financial statement revealing the full extent of their income and assets to each other before they agree how to divide their finances. Previously, once a financial agreement had been ratified by the court as a consent order, it would rarely be overturned, save for very limited circumstances.

In October 2015 the Supreme Court ruled that such concealment amounted to ‘fraudulent misrepresentation’ and permitted two spouses to return to court to renegotiate their divorce settlements.

Catherine Polli, Head of the Family Law Department at Pinney Talfourd Solicitors in Essex, says ‘the implications of these two cases are very important – as they allow any spouse who believes that they have been cheated out of their rightful financial settlement to challenge the original court order. They should speak to a specialist family lawyer for advice on their particular circumstances.’

The two women, Alison Sharland and Varsha Gohil, had both made divorce settlements in good faith with their husbands, only later to find out that they had been deliberately misled about their financial worth.

In 2010 Alison Sharland, from Wilmslow in Cheshire, signed a consent order accepting a divorce settlement from her then husband Charles of £10 million and 30 per cent of the net proceeds of the sale of his company, whenever that took place. Charles owned his own software company, which was valued at £47 million at the time of the divorce on the basis that he had no plans to sell it.

Mrs Sharland later discovered the company was actively being prepared for sale on the stock market at an estimated worth of £600 million. The Supreme Court considered the principle that ‘fraud unravels all’ and found that Mrs Sharland was the victim of fraudulent misrepresentation and she would not have consented to the original order if she had known the truth. The case will now go back to the family court for Mrs Sharland’s settlement to be re-examined.

In a separate case heard at the same time, Varsha Gohil from London accepted £270,000 in her divorce settlement only later to find out that she could have got much more. Her husband later admitted to intentionally misleading the court and Mrs Gohil about the extent of his wealth, when he was found guilty of fraud and money laundering of £37 million. The financial settlement was set aside and will again be returned to the family court.

If you believe that your ex was dishonest about their finances at the time of your divorce, you should take legal advice immediately. Pinney Talfourd Solicitors can help you to make further enquiries and even enlist the services of professionals, such as private investigators and forensic accountants.

For more information about divorce settlements and disclosure please click here to contact our Family Law Department or call 01708 299444.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice, and the law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice on their own particular circumstances.

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