Franchises have become part of our everyday experience. We eat at franchise restaurants, shop at franchise clothing and home goods stores and sleep at franchise hotels. Franchising as a business concept developed and became popular in fast food and retail sales businesses. But over the last 20 years franchising has expanded to businesses offering all types of goods and services, such as senior care, sports, fitness and education, to name just a few. Professional services businesses, such as health care providers and business consultants, have also developed successful franchise systems.
Franchising enables a business to expand its brand by granting others the right to operate a business using, the franchisor’s business model and trademark or tradename, largely at the franchise operator’s expense. But franchising is not the right business model for many businesses. Here are some basic questions you should consider as you explore whether franchising is right for your business.
Franchising is just one way to grow an established business. Many businesses expand their market footprint by using equity or debt financing to provide expansion capital, enabling the business owners to maintain total control over the operation of their business. By franchising, a business necessarily gives up some control to independently owned and operated franchisees, but it can also allow a business concept to grow more quickly with less capital investment. So how quickly a business wants to grow, where it wants to grow and how much control over day-to-day business operations it is prepared to give up in the process of growth are factors to consider before embarking on franchising.
Franchising allows you to minimize the risk of expanding into markets that are unfamiliar to you. Typically franchisees are business people who have lived in and have prior business experience in markets where they will be operating the franchise. As a consequence, a franchisee may have a better chance of successfully establishing your brand in the market. Moreover, rather than you having to invest money to open a new location in another city or town, with your training and support the franchisee will be responsible for the real estate costs, equipment, furniture, advertising, employment and the myriad of other expenses involved in the start-up of the business. This allows you to minimize your financial risk as you expand your brand into other markets. In exchange for the right to use your business model and trademark, and the training and support you provide, the franchisee will pay you an initial franchise fee and continuing royalty and other fees which normally are based upon a percentage of the franchisee’s gross revenue.
As a franchisor, you will be engaged in a different type of business than you have traditionally operated. For example, if you are considering franchising a bakery business, you likely will have owned and operated a bakery for several years and know what is required to operate a successful bakery. But success at operating a bakery will not necessarily translate into success as a franchisor. As a franchisor, you will not be operating a bakery. Rather, as a franchisor you will be selling franchises, training and supporting franchisees, and visiting and inspecting the bakeries of your franchisees to ensure compliance with your system standards. You will need the resources to perform the various obligations of a franchisor if you want to have a successful franchise system. You can continue to operate the business that you started as a “company owned” business and set up another company to be the franchisor, but it is likely that your primary business going forward will be selling and supporting franchises, rather than operating the original business.
Not all successful business concepts will make successful franchises. Among other things, the type of business, the level of development and uniqueness of your brand, the level of competition, the economy, local market conditions, consumer preferences, and laws and regulations governing the business operations can impact another business person’s willingness to invest as a franchisee in your business concept. Information is generally available on whether comparable businesses have successfully franchised. Whether someone else has franchised a comparable business concept and whether the franchise effort has succeeded, does not necessarily predict whether your concept can be successfully franchised, but having that information could be helpful as you consider whether to franchise.
Most successful start-up franchisors have successfully operated the business that they want to franchise for a minimum of 4-5 years before deciding to franchise. It is important that a business owner who decides to franchise has had adequate time to develop and refine the business concept, and to demonstrate that the business concept can be successful over the long term if operated in accordance with established standards and procedures. A prospective franchisee will not be willing to invest tens of thousands (or in some cases hundreds of thousands) of dollars to start a franchise business if the business concept is poorly developed and/or unproven. If you have not been in business for a long time, but are considering franchising in the future, there are several steps you can take to prepare your business for franchising. Among other things, you can (a) trademark the name and any logos which you are using in your business and would be used by franchisees, (b) establish connections with product suppliers and service providers who you can later designate for use by franchisees, (c) refine your business practices so that they can be replicated in other markets, (d) develop a marketing plan and advertising materials that can be used by franchisees, and (e) prepare written standards and procedures that can be later incorporated into a confidential operations manual to be used by franchisees. Even if you decide not to franchise, all of these are prudent practices that can enhance the value of your business.
Yes, there are other ways to grow your business. The traditional method to grow your business is to invest your own money or look for equity or debt investors to provide expansion capital. Alternatively, depending on the nature of your business, a joint venture, distributorship or sales representative relationship may be worth considering. But you need to be careful to not inadvertently create a franchise relationship if one is not intended. No matter what you call it, if the business relationship is a franchise as defined by law, you will need to comply with applicable franchise registration and disclosure laws. The possible applicability of state business opportunity laws should also be considered.
Franchising is a special type of business relationship that is governed by a complex set of federal and state laws and regulations. There are various online sources with information about franchising and the legal requirements to franchise. As with most other topics, some of the sources are reliable and others are not. So it is important that you consult with experienced advisors who will take into account your specific business and goals when advising you. For advice on the types of business relationships that constitute a franchise, the legal requirements for franchising and alternatives to franchising, you should contact an experienced franchise lawyer. If you are interested in obtaining business advice regarding franchising your business, you should consult with a business consultant who has a business background in franchising and specializes in consulting with business owners who are considering franchising.
At Caulkins & Bruce, PC, we do not charge for an initial consultation with a business owner who is considering franchising and alternatives to franchising. During the initial consultation we discuss the general legal framework that applies to franchising and the steps that you will need to take to comply with the applicable franchise laws. We also generally discuss the alternatives to franchising. If you are interested in scheduling an initial consultation, please call or email Scott Caulkins.
The information presented here is not intended to provide specific legal advice applicable to any particular circumstance nor is it intended to form an attorney-client relationship between you and Caulkins & Bruce, PC
"Obtained a judgment for condominium association in excess of $1 million against developer of condominium in Fairfax County."
"Defended an officer of a government contractor in a case involving enforcement of a non-competition agreement."
"Defended and achieved favorable settlement of wrongful termination and discrimination claims brought in United States District Court for the Eastern District of Virginia."
"Served as outside counsel to several franchisors, prepared franchise agreements, franchise disclosure documents and state franchise registrations, and counseled franchisors regarding franchise compliance issues."