WHAT YOU NEED TO KNOW ABOUT FRANCHISING YOUR BUSINESS
Dec. 15, 2021
In 2020, according to the website Statista, there were 753,770 franchise establishments in the United States, employing 7.49 million people. Under a franchise agreement, a franchisee can utilize the franchisor’s business model and ideas.
Franchises operate under the name of the parent company. McDonald’s is the largest franchisor, accounting for $93 billion in yearly sales, followed by 7-Eleven with $92 billion in sales.
Research firm FRANdata estimates that each year 250 to 350 new brands choose to franchise their businesses, while 13,000 to 20,000 franchisees sign agreements to open their own franchised business.
If you’re seeking to set up your business as a franchise or looking to open an existing franchise, contact Bundy Law Firm PLLC. After decades in the franchise industry, the attorneys at Bundy Law Firm PLLC know franchise law backwards and forwards. They stand ready to assist you with any questions or issues you have involving franchising, whether as a franchisor or franchisee. Bundy Law Firm PLLC is located in Seattle, Washington, but proudly serves clients throughout the United States.
What Is Franchising?
You may have heard of Singer sewing machines. In fact, you or someone in your family may have owned one.
Isaac Singer developed the sewing machine bearing his name, and he wanted to sell it nationwide. He knew – back in the 1850s – that selling nationwide would be virtually impossible to do by himself, so he began selling licenses to market his product in various other parts of the country. Thus was born the concept of franchising, which is now not just national but international.
According to the International Franchise Association (IFA), franchising consists of:
“A contractual relationship between the franchisor and the franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format or procedure owned by or controlled by the franchisor, and in which the franchisee has made or will make a substantial capital investment in his business from his own resources.”
Types of Franchises
Currently, there are more than 3,000 franchise concepts operating in the United States. Most franchises are involved in the fast-food industry or even the fast-casual food industry, but generally speaking, there are two types of franchises:
The first is the business format franchise as exemplified by McDonald’s and 7-Eleven.
The second type, the product distribution franchise, is similar to what Singer did: find licensees to market and sell the parent company’s products or services.
The business format franchise allows the franchisee access to the franchisor’s products or services, along with their business model, trademarks, operating procedures, training, computer systems, and marketing approaches.
Typical product distribution franchises include automobile services, soft drink distribution, equipment dealers, and gas stations. Here, the franchisor supplies the franchisee with their trademarks and logo, but not necessarily the whole system for running their business. McDonald’s may offer Hamburger University, where you can go to master running their franchise, but a gas station franchisor probably will not offer something similar.
Benefits of Franchising
For those wishing to start their own business, the franchise model simplifies the entry process. You not only gain the knowledge of the product or service you’re offering, but you get to open under a proven business model. This can avoid the months or even years of trial and error to implement your own successful business model.
If you’re a business owner who wishes to expand his or her reach – just like Isaac Singer did – you can use the franchise model to get your brand out to a wider audience. Since the franchisee must not only pay you for the franchise license – upfront and on an ongoing basis with royalties – you can benefit from an initial and ongoing cash infusion.
Meanwhile, the franchisee must also finance the physical location for their operations, or if they’re distributing your product like the iconic Singer sewing machine, then the expenses of finding consumers and distributing the product. You as the franchisor also have to share your trademarks, logo(s), business model, and operating procedures.
Key Steps in Franchising
If you want to franchise your business for the first time, you’ll need the assistance of attorneys experienced in and knowledgeable about franchising and the laws governing it, including the Federal Franchise Rule issued by the Federal Trade Commission (FTC).
The first requirement under the Federal Franchise Rule is to prepare a franchise disclosure document (FDD), which will need to be updated yearly. The FDD is broken down into 23 mandated sections. You will need an attorney to get the language and details right and expressed in the proper legal format.
You will also need to register all your trademarks and establish a proper legal entity for your franchise, whether a corporation or a Limited Liability Company (LLC). You will also need to consider and then create appropriate instructional documents for your prospective franchisees, including an operations manual, marketing instructions, product descriptions and details, and the like. In addition, some states require you to register your franchise.
After all of these steps are successfully completed, which we can call the franchise development stage, you can begin marketing and selling your franchise, which can be called the franchise sales stage. Here, you can try various methods to attract potential franchisees, including word of mouth, social media, paid advertising, or franchise brokers.
If, on the other hand, you’re looking to get into franchising someone else’s product or service, you must first ask yourself what type of business really suits you, your background, your education, and your temperament. Getting a franchise up and running, like opening any new business, can require hard, long hours to get things off the ground.
Once you’ve identified the type of franchise that suits you, talk with others who have franchises in that area or with the same franchisor you’re considering. Franchisors generally offer what is called a “discovery day,” where you and other potential franchisees can meet with the franchisor’s representatives. Often, this will take place at a corporate headquarters.
Once you’ve decided to take the plunge, you will need to find a location for your franchise and gather together the necessary funding. Starting a franchise can be rather expensive if you factor in the licensing, lease or purchase of a space, equipping of the space, and then obtaining the necessary licenses and permits.
And of course, you will have to sign a franchise agreement and consent to its financial terms, which generally include an upfront fee (called an “initial franchise fee”), then a percentage of revenue going forward (royalties), and perhaps fees for marketing and advertising.
Before you open your franchise business, you will also have to hire employees, train them, and then pay them the agreed-upon wages comporting with relevant minimum wage and overtime laws.
Franchise Attorneys in Seattle, Washington
If you’re looking to operate a franchise from an existing brand, the general steps are briefly outlined above, but the devil is in the details, as they say. You may run into issues with financing and need help. You also want to have a knowledgeable attorney review your franchise agreement before you sign it.
If you’re looking to franchise your business model, then there is no better place to start than with the attorneys at Bundy Law Firm PLLC. They have decades of experience in franchising and stand ready to help you wherever you’re located in the United States. Contact Bundy Law Firm PLLC today to set up an initial consultation.