Best in Law: Is it Time to Franchise Your Business?
Thomas O’Connell Writes About Factors to Consider Before Growing
For those looking to grow a thriving, established business, franchising offers an attractive option.
But making the decision to franchise is not simple. While franchising offers an avenue to cost-effective growth, any potential mistake is amplified when taking into consideration the scope of newly introduced factors in any franchising scenario. Here are some critical factors to consider before deciding whether or not to franchise your business.
Is Your Business “Franchisable?”
Not every prosperous business is suited for franchising. However, there are clear, common characteristics found in successful franchisors. Consider how your business ranks in the following categories:
Credibility – A successful franchisor is one with a marketable concept proven over time. It goes without saying that, at the very least, your business should be thriving at one site (the more, the better). Local press and public acclaim are both useful indicators to gauge your business’ reputation, and attention from beyond the immediate region is even better. If you’re seeing demand from outside the local geographic area, it may be time to consider franchising. If you are receiving express requests to franchise it is definitely time to consider franchising.
Uniqueness – Your potential franchise requires a product that differentiates itself from competitors. A successful franchise needs to market its business model as a good investment, and ensuring a sustainable competitive advantage through a unique product is one way to accomplish that.
Replicability – Consider whether your business is run with defined (preferably documented) systems and procedures in place that can be lifted and copied to a new location. A franchisee needs to be able to set up an operation as quickly as possible. A business model that is difficult to replicate will likely lead to both your own and your franchisee’s frustration.
Profitability – It goes without saying a franchisor needs to be able to provide value to franchisees for their investment. A potential franchise should provide an adequate return on investment after franchise fees are accounted for.
Readiness – Franchising is no ordinary decision. A franchisor effectively stops selling its product and instead sells its business concept. Consider whether your business is in a position where it can survive the shift in focus, whether you are ready for the shift in management paradigm, and whether you possess the resources to weather the inevitable adjustment.
How to Franchise?
Making the decision to franchise is only the first step in a long, complicated process.
Franchising is strictly regulated by the Federal Trade Commission and carries with it a host of statutory and procedural requirements. A potential franchisor should seek legal assistance with an experienced franchise law attorney to navigate administrative hurdles and ensure any franchise plan steers clear of legal and governmental issues.
Some of the elements of franchising that an attorney can assist with include:
Franchising plan – Successful franchise plans consider factors including any franchise offering, support mechanisms, staffing requirements, resource allocation, territorial development, rate of growth and fee structures, among others.
Franchise agreement – The meat of the franchise arrangement is the master franchise agreement. Consult an attorney to ensure that your franchise agreement contemplates commonly encountered issues including nondisclosure agreements, copyright, trademarks, assignments and buyback provisions, among others.
Offering circular – FTC Rule 436 requires disclosure of certain key information pertaining to the offered franchise.
Quality control systems – Franchisees require many resources to get their franchises up and running. An attorney should be consulted to review any potential operations manuals to ensure legal compliance in company policies and procedures.
State registrations – This can vary substantially but should be accounted for by any business that is considering franchising.
*This article first appeared in The Press-Enterprise and other Southern California Newspaper Group publications online on June 15, 2018. Republished with permission.
Thomas O'Connell is no longer with BB&K. If you have questions about this law please contact firstname.lastname@example.org.