Franchising Your Business
By Stephen E. Story
So, you own a thriving business that is well-run, successful and making money. You have thought about franchising your business and wonder what that entails. This article will give a very brief overview of the basics of franchising your business.
1. Is your business franchisable?
Not all businesses can be successfully franchised. Businesses that lend themselves to the franchising business model are, among other things, typically easily systematized, easily replicated, and not dependent on the personality strengths of the founder for its success. Conversely, businesses that are highly complex and don't lend themselves to easy systematization, or that are heavily dependent upon the founder's personality or skill, are less likely to be successfully franchised. The existence of other franchisors in your line of business is usually a good sign that the business can be successfully franchised. Consultants can also help with this determination in more specialized cases.
2. Franchising is a different business than the business you franchise.
When you become a franchisor, you truly enter a different business, with a different business model. As a franchisor, your focus will be on recruiting the right franchisees, training them to replicate your success and providing ongoing assistance and support. While you must remain knowledgeable about successfully running your underlying business, your focus as a franchisor will differ significantly from just running that business. Be sure you are well suited to become a franchisor. Carefully read Chapter 16 of Franchising for Dummies (coauthored by Dave Thomas, the founder of Wendy's).
3. Franchising is highly regulated.
Franchising is highly regulated, at both the federal and state levels. You must provide prospective franchisees with a Franchise Disclosure Document ('FDD'), a government mandated document that has 23 specific disclosure items. In addition, you must file your FDD and have it approved before you can lawfully offer to sell franchises in the following states: California, Hawaii, Illinois, Indiana, Maryland, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. You will also need a franchise agreement, the contractual document that governs the relationship between you, as franchisor, and your franchisee.
4. Register your trademark.
If you are even thinking about franchising your business in the future, you should immediately investigate registering the name under which you operate your business as a federal trademark with the United States Patent and Trademark Office ('USPTO'). The USPTO can take up to 18 months to issue a federal trademark registration, and there are distinct advantages to having a federal trademark registration at the time you begin selling franchises.
5. You will need working capital.
Successful franchising takes substantial working capital. State franchise regulators will want to see that the franchisor entity has sufficient working capital to remain in business and support its franchisees. Between legal expenses, working capital, accountant's expenses, developing the training program and operations manual and the infrastructure necessary to sell and support franchises (all discussed below), those entering franchising will typically need well in excess of $100,000.
6. You will need an operations manual and training program.
As a new franchisor, you will need an operations manual, a comprehensive manual that explains to your franchisees how they can successfully replicate your business model. If you do not already have training materials, you will need to compile them, either in-house or by hiring a skilled consultant or technical writer.
7. You will need audited financial statements.
You will be required to have three years of financial statements for your business (unless you choose to have a new entity, such as a new limited liability company, serve as franchisor (recommended), in which event financial statements will be required from the inception of that new entity). These financial statements usually must be audited by an independent certified public accountant.
8. You must develop support infrastructure.
You will need to develop infrastructure to support solicitation and sales of franchises and ongoing support of franchisees thereafter. Successful franchising requires hiring and training employees to successfully sell franchises, train new franchisees and monitor new franchisees' compliance with your system.
9. You should find a good franchise lawyer.
Franchising is subject to a wide variety of intricate and specialized laws. Your attorney must be familiar with such specialized areas as registering your franchise offering in the registration states, determining allowed sales and advertising activities, disclosure requirements, and when you must give an FDD to potential franchisees and have them sign the required contracts. It is imperative that you find a good lawyer who specializes in franchising and can guide you through the maze of legal requirements. Good indicators of a qualified franchise attorney include representing other franchisors and membership in the American Bar Association Forum on Franchising and the International Franchise Association's Supplier Forum.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.