The Accidental Franchisor

Recently I heard a conversation between attorneys regarding a business transaction they were in the middle of setting up for a client. The client wanted to do a series of LLCs or joint ventures with various partners. The client would contribute the business concept and name and the other “partners” would contribute money and time to operate the businesses. What these attorneys did not understand is that they were setting up a franchise system for their client.

 

Very often a business will be structured without realizing that the structure is a franchise. A franchise exists if the definition of a franchise is met, not if the franchisor knew they were selling a franchise. In this case, the client’s business transaction has all three definitional elements of a franchise: 1) Use of a trademark (the use of the client’s business name); 2) A marketing plan, substantial support, or community of interest between the franchisor and franchisee (the contribution of the business concept by the client); and 3) Payment of a fee (the financial contribution by the partners).

 

Because the client’s business transaction is a franchise, the client is required to comply with federal and state laws regarding the sale of a franchise, prior to entering into the business. This means that before entering into these partnerships, the client would be required to provide the financial “partner” with a disclosure document discussing information about the business and trademark, background information on the client and its business and affiliates, and other “partners” or franchisees of the client.

 

There are serious consequences for selling a franchise without complying with the franchise laws and regulations. These consequences include rescission of the business transaction, damages and attorney’s fees, plus the potential of fines or other penalties from state or federal agencies. In some cases, the transaction can be seen as criminal.

 

Next time you are setting up a business concept that has any of these elements (trademark, marketing plan, and/or fee), it is worth the time and cost to consult a franchise attorney to make sure that you are not an accidental franchisor.

Success in Franchising

When I tell someone that my business law practice focuses on franchising, I will at times get a blank stare. This is where I explain that franchising is a concept where a person licenses out their brand and business system to another person in order for that person to operate a similar business under the same name. If I am still getting a deer-in-the-headlights look, I will say, you know, like McDonald’s. Once the golden arches are mentioned everyone understands.

 

However, I was recently reading an online article from Entrepreneur Magazine about the top franchises[1]. The surprise I took away from this article was the fact that Subway outranked McDonalds on the list of America’s top 10 franchises and the top 10 international franchises.

 

I don’t know the exact ingredients that Subway has combined in order to make their franchise even more successful than the most well known franchise in the world. If I were to guess, I would not bank it on the popularity of Jared as a spokesperson, $5 footlongs, or the innovative and newest sandwich. Instead, I would guess that, in some way, Subway’s franchisees are making more money than McDonald’s franchisees.

 

Whenever I meet with a new startup franchisor, the number one thing I like to emphasize is that a successful franchise brand is one in which the franchisees are successful. There are other issues to consider for success, but a franchise system in which the franchisees have the ability to make money will grow. Successful franchisees will tell others about the franchise and franchise sellers and brokers will feel comfortable pushing the franchise brand over other brands.

 

Some other factors that go into the success of a franchise business include: having a teachable system in place; providing the proper amount of support to the franchisees; excellent training; creative branding; and good marketing. All of these things will help the franchise system grow. But when you really focus on these additional items, they all boil down to the same goal: helping the franchisee turn a profit.

 

So the next time you want to brainstorm about expanding your franchise business, first look to your system and see how you can help your franchisees increase their profits. This will help you increase the number of franchises in your system. Maybe one day your system will be even more recognizable than the golden arches.

---

[1] http://www.entrepreneur.com/slideshow/222422

Franchising

Franchising allows a business owner to leverage limited capital to grow a business concept. It is a proven business model and when done correctly, can reap great benefits. But when done incorrectly it can yield results that can include civil and criminal penalties. Franchising is a complex form of business that requires knowing the right questions to ask and having experienced legal counsel that can guide you through not just the regulations but how to create a successful business model. We hope to help prepare you to begin a new franchise or to make your existing franchise more successful.