December 1, 2016

I have a very successful business, and I have been asked if I can license/franchise it to others – let’s do it.  Not so fast – becoming a franchisor or creating a franchise system is not a simple or easy task.  Even though some may think otherwise; if done properly, it is one that will take time, effort and financial commitment.  Franchising is not for every business, and there may be other growth models that are better suited to a business owner’s particular goals and objectives.  A good franchise system is based on a model that can be duplicated and used by others.  It is not necessary to have more than one location running, but it makes good sense if you have tried to duplicate it before developing a franchise model.

Franchising is a regulated business model starting with the Federal Trade Commission Franchise Rule (“FTC Franchise Rule”).  In addition, many states have elected their own versions of the FTC Franchise Rule, which are, at times, referred to as “Little FTC Acts.”  These laws govern not only the formation and registration of a franchise, but also the relationship aspects between a franchisor and its franchisees.  Franchising is a growth model that, in essence, utilizes the financial resources and sweat equity of others (franchisees), to allow the business owner franchisor to expand the business concept.  In return, the franchisor typically receives an initial franchise fee, ongoing royalties and other monetary payments associated with brand marketing, product supply, and other related matters.  However, the franchisor is then, to a certain extent, giving up certain controls and profit.

In establishing a franchise system, not only do the legal requirements need to be addressed, but equally important is the creation of the business model for the franchise, not be done in ad-hoc fashion.  The operations of the existing business will need to be “translated” into a franchise business model.  For starters, most Franchise Agreements are for a five, ten or fifteen year period.  Since the franchise relationship is for a long period, it is important that a detailed analysis as to whether or not franchising is the right growth model for the business be performed properly, and if it is the right model, how that franchise system will be structured.  

Keep in mind too, that franchisees are making an “investment” in the franchisor (or at least that is how it is perceived).  Upon determining that franchising is the appropriate model and having determined the overall general structure, the franchise lawyer can then prepare the Franchise Disclosure Document (required by the FTC Franchise Rule) and the state registration requirements in order to meet the business goals and objectives and to comply with the federal and state rules concerning the offer and sale of franchises.  Additional legal aspects of developing the franchise system include the protection of various intellectual property assets, structuring the franchisor entities, and analyzing Federal and State income tax matters.

The representation of franchisors, from start-ups to mature and experienced systems, is an ongoing and evolving relationship.  Not only does it need to comply with the FTC Franchise Rule and the various state registration and notice requirements; at the very least, there will be required annual updating.  It, indeed, takes a village for a well-structured franchise system, whether it be a start-up or experienced system, and advice and guidance from professionals is essential to help navigate a business owner through the process.

For questions, comments or additional information, please contact Harris Chernow, Chair of our Franchise & Distribution Practice Group.