Franchising Your Business – 2005 Version
So, you have a thriving _________________ (fill in the blank – restaurant, retail, service) business that is well-run, successful and making money. You have thought about franchising your business and wonder, what, exactly, does that entail. This article will give a very brief overview of the basics of franchising your business.
1. 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. I recommend reviewing Dave Thomas’ (the founder of Wendy’s®) excellent book, Franchising for Dummies, Chapter 16.
2. Franchising is highly regulated.
Franchising is highly regulated, at both the federal and state levels. You must provide prospective franchisees with a Uniform Franchise Offering Circular (UFOC), a government-mandated document that has 23 specific disclosure items. These items will disclose the nature of your business, its principals and their backgrounds, any disclosable litigation, the up-front fees, ongoing royalties and other costs associated with the franchise and a variety of other matters. You also need a franchise agreement, the contractual document that governs the relationship between you, as a franchisor, and your franchisee.
3. You will need an operating manual.
As a new franchisor, you will need an operating manual, a comprehensive training manual that explains how your franchisees 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 to assist you with that function.
4. You will need audited financial statements.
You will be required to have three years of financial statements for your business (unless you are a new business, in which event financial statements will be required from the inception of the business). These financial statements usually must be audited by an independent auditor.
5. You must develop support infrastructure.
You will need to develop an infrastructure to support solicitation and sales of franchises and ongoing support of franchisees thereafter. Successfully franchising requires a significant investment of money and time, to develop the required franchise documents, financial statements, and operating manual, and to hire and train employees to successfully sell, train and monitor new franchisees’ compliance with your system.
6. 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 a number of states (including Virginia), determining allowed sales and advertising activities, disclosure requirements, and when you must give a UFOC 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 for becoming a successful franchisor. 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. Copyright 2020.