Turning Your Small Business into a Bigger Chain as a Franchise - dummies

Turning Your Small Business into a Bigger Chain as a Franchise

By Michael H. Seid, Joyce Mazero

A mistake many emerging franchisors make is going initially to a lawyer and telling them to prepare their franchise documents. When properly prepared, franchise agreements and disclosure documents need to reflect the necessary, underlying business decisions and should only be prepared by lawyers after the strategy and business determinations have been made and validated.

You should begin your work in developing your franchise system with experienced business professionals because most lawyers can’t provide business advice with the professional rigor used by qualified business professionals.

Though you need an FDD to become a franchisor, don’t confuse the ability to sell franchises with being a successful franchisor. Being able to sell a franchise is not an indication of much — selling a franchise is not all that hard to do. Any number of franchise systems have sold franchises and didn’t survive past their third, fourth, or fifth year.

Being the first to market with a franchise concept also has little to do with success. The market will always accept great products, services, and concepts that provide consumers with what they want in the way they want it. If you’re new and innovative, if your product or services meet consumers’ needs better than what’s currently available, you shouldn’t fear going to market.

Consider franchise systems like Firehouse Subs or Five Guys, which have emerged as leading franchise systems. When they first began franchising, the market was flooded with large, established franchise systems in the quick service sandwich and burger industries. What allowed them to compete effectively, even in what some called saturated markets, were outstanding products wrapped in an intelligent consumer offering that produced an attractive return on investment for their future franchisees.

Established franchisors and other large, established companies frequently suffer from what is called incumbent inertia. Incumbent inertia describes companies that feel so secure in their market position that they don’t innovate because they don’t fear small upstart competitors.

How do you think the taxicab industry feels today in the world of Uber and Lyft? You get the point. The taxi industry had the necessary scale and resources to evolve but dismissed the newcomers and the needs of the consumer — and now companies like Uber and Lyft dominate the “driver for hire” market. Amazon continues to demonstrate the advantage of being an innovator and disrupter in the marketplace, and companies like Sears are quickly become a memory as they close once profitable stores.

Deciding whether your business should be franchised

In the United States, with the exception of states that require a franchisor to send in their disclosure documents for review, no federal or state agency ever has to see your franchise offering documents before you begin to recruit franchisees. Becoming a legal franchisor is really quite easy in most U.S. states, and outside the United States, having a disclosure document may not even be required.

Check the Franchise Management Dummies page for a summary of domestic and international franchise laws.

Technically, all you need to be a franchisor is an FDD that you can hand to a prospective franchisee two weeks before they sign an agreement or give you a check. You legally don’t even need a consulting firm like MSA or a law firm like Gardere because in the back of certain magazines, next to the ads for instant seahorses and pills to help you lose 30 pounds without changing your diet, you’ll see companies that will sell you blank franchise documents you can fill in yourself. They even sell boilerplate operations manuals.

In franchising there are consulting firms and law firms that are called packaging firms. These are, for the most part, firms that use boilerplate strategies and legal documents to create franchise systems — as if one size fits all. Going that route can be very risky, not only for you but for any franchisee you recruit into your franchise system.

Answering the question “Can I franchise my business?” is easy. Regardless of what business you are in, you can franchise your business. Seriously, you can franchise any business. But “can I?” is the wrong question. What you need to know is whether you should franchise your business.

Putting the preliminary legal requirements in context to franchise your business

Because of the requirement in some states that requires pre-sale registration of a franchisor’s disclosure documents, there is a perception that franchise laws are complicated and onerous. They really aren’t, and with the aid of a qualified franchise lawyer, navigating through the franchise regulatory process is relatively simple.

Under certain states’ laws, a franchisor sends its pre-sale disclosure document to a state regulator, which reviews the documents for compliance with that state’s law. The state regulator doesn’t opine about the quality of your franchise agreements, nor do they care whether or not your concept is based on a good idea. It is not their responsibility to determine whether your concept has been tested or whether the underlying business you are offering as a franchise has ever made a dime.

That’s not their job, although some states will require your financial statements to show that you have sufficient capital to fulfill the promises you have made in your FDD to prospective franchisees. There is no minimum standard in the United States for who can offer a franchise and, under the law, a franchisor doesn’t even need to have any level of competence or experience in the business opportunity being offered.

Think of franchise registration like an automobile emissions test. If you pass, you can drive your car on the street. Both a brand new Bentley and a 30-year-old Yugo take the same test. But passing that test doesn’t mean they are equally good cars and, for certain, the emissions test doesn’t even let you know if you have enough gas in the car to drive it down to the corner. All franchise registration means is that you can legally offer franchises in that state.

For most lawyers and other professionals, it’s not hard to get a franchise system registered in most states. Therefore, before you begin to develop your franchise system, before you invest in the creation of brochures, before you invest in the creation of legal documents and hire franchise sales and support staff, it is only sensible and prudent to first find out whether what you have is franchisable.

It’s also important that you assess whether you have put in place the requisite protections for your trademarks and other intellectual property, like manuals, recipes, and in some cases, patented equipment, products or other items. Sometimes an owner can lose valuable intellectual property rights if the trademarks and other intellectual property aren’t protected properly under intellectual property laws. This is an area in which you should promptly talk with your attorney so you know your rights and the proper timing for obtaining the necessary protections. Whether you franchise or not, protecting your intellectual property makes good business sense.