Franchising Basics; Helpful Information For Business Owners Considering Expanding Through Franchising.
Congratulations! If you are considering franchising, that most likely means you have opened and successfully operated a new business; no easy feat in today’s economy! As you likely already know, franchising can be an incredibly effective way to grow your business and brand. Like many business owners who are new to franchising, you may find yourself wondering what the process looks like. It may surprise you to find that, even if you are not looking to franchise for several years (or are unsure as to whether franchising will ultimately be the right way to grow your business), there are certain issues all expanding businesses should keep in mind – both to make franchising down the road an easier process, and, more generally, to protect your business and its assets.
First, you should know that there are federal regulations and various state laws governing the sale of franchises.
All franchises must comply with the Federal Trade Commission regulations relating to the sale of franchises, and the laws of the state where they intend to sell franchises. In the U.S., franchisors have to complete a franchise disclosure document (commonly referred to as an FDD). The FDD contains 23 mandatory items of disclosure, including basic background into the franchisor, the franchisor’s business experience, and specific information regarding fees and payments the potential franchisee will be required to pay prior to opening a franchise location, and fees and expenses involved in operating the franchised business. The FDD also must include all proposed agreements relating to the sale of the franchise, which typically includes a franchise agreement, confidentiality agreements, non-solicitation agreements, guarantees and other agreements particular to your business. In addition to completing an FDD, thirteen states (including New York) require franchisors to register their FDDs before they can begin offering franchises in those states. Our firm has decades of experience creating these documents, and can provide more information for you regarding the FDD and any relevant state laws or federal regulations, at any time.
This is critical information for all expanding business owners to have, because you must be careful not to provide information regarding the sale of a franchise in your business to potential franchisees without first completing and potentially registering and/or filing your FDD as required by the state you are offering franchises in. When potential franchisees approach you regarding franchise opportunities, the information you provide could potentially run afoul of state laws and/or federal regulations before you start! The best approach is to indicate you might be interested in franchising your business but aren’t franchising at this time and to take their information to contact them at a later date (after discussing disclosure issues and procedures with your attorneys).
Second, you should evaluate your business’ organizational structure to ensure you are best protecting your business and its assets.
Among other things, we recommend creating separate entities to hold various assets. For example, one entity should own your trademarks. Separate entities should be created to operate your business/es. Each separate entity using the trademarks should enter into a license agreement with the trademark-owning entity. This is the best strategy to protect your trademarks. We also recommend creating separate entities for franchising, manufacturing/supplier businesses and other aspects of your business in order to shield your business’ assets from liability and separate revenue streams.
Again, this item is notable even if you are not considering franchising at this time. Among other things, creating different entities to hold/operate various aspects of your business will allow you to get capital investments for certain entities, without giving investors any rights to your other entities. For example, an investor may wish to provide capital for the manufacturing aspect of your business; this potentially will allow you to get that capital infusion without giving that investor a right to your trademark and/or your franchising business. Our firm has a great deal of experience in structuring corporations to both take advantage of growth and protect assets, and is available to consult on these and other issues.
Third, you should protect your trade secrets.
In addition to creating separate entities to hold your trademarks, you should be mindful of the access you are giving various employees or high level managers in your business to proprietary information. Creating non-solicitation and non-competition agreements with your existing employees can enable you to continue to grow and develop your business without worrying that your ‘secret sauce’ will replicated by a competitor at a later date. We can create these documents or review existing documents, and advise you on ways to execute these with existing employees.
Fourth, you should consider whether your business is a good fit for franchising.
Here, it is best to speak to a professional. Our firm has a great deal of experience franchising new businesses. We also have many contacts in the franchise industry that we can refer to you in order to determine if franchising would be an effective tool to grow your business. We can discuss how quickly you want to grow, your overall vision for your brand, and what strategies will make that growth and your vision possible (we can discuss whether, for example working with a broker is a good strategy and whether you may wish to consider using area development agreements or multi-unit development agreements, among other things). In order to make these determinations, we will need to learn about your business. We want to know if your business can be replicated, what your backstory is (this is useful to market and sell franchises). We want to learn about your target customers, ideal locations and any other details that make your business successful and unique. We will also want to review your financials. We will want to see a breakdown of your sales volumes both in any brick and mortar locations and online, labor costs, other critical costs (i.e. food costs in restaurants), and the estimated cost to create a new location.
Our firm takes pride in our hands-on approach to developing each new business in accordance with each individual client. We appreciate that each client is the expert on his or her business, and we realize that franchising, while an exciting opportunity to expand your business and brand, can also be somewhat intimidating. Please feel free to call us to schedule a free consultation about our services and how we can help you and your business grow.