WHEN IS THE RIGHT TIME TO FRANCHISE YOUR BUSINESS?
June 23, 2022
In the mid-19th century, Isaac Singer had an idea on how to market his namesake sewing machine across the nation—and thus the franchise industry was born. The industry, needless to say, has grown exponentially to the point where, in 2020, there were 753,770 franchises in the U.S.
The road to franchising your business can be complex, especially if you’re wondering if it’s the right time to do so. You may well believe that the product or service you’ve developed is ready for franchising, but you need to examine the pros and cons—including what it takes to satisfy government regulations and also convince others of your brand’s unique selling opportunity.
If you’re looking to franchise your business, rely on the Bundy Law Firm PLLC. Their attorneys have more than four decades’ experience in helping others start franchising, whether as franchisor or franchisee. From headquarters in Seattle, Washington, the firm proudly serves clients throughout the U.S., including Oregon, Texas, and Florida.
Definition of a Franchise
The franchising business is governed by 16 CFR (Code of Federal Regulations) Part 436, which defines a franchise as “any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:”
Will allow the franchisee to use the franchisor’s trademark “to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor's trademark”;
Will allow the franchisor to “exert a significant degree of control over the franchisee's method of operation, or provide significant assistance in the franchisee's method of operation”;
Will require a franchisee to “make a required payment to the franchisor or its affiliate.”
Regulation of Franchises
The Federal Trade Commission (FTC), as well as some states, exert regulatory control over the franchise business. Most importantly, the franchisor must provide each franchisee with a 23-part Franchise Disclosure Document (FDD), which spells out all of the conditions of the agreement, including franchise fees, royalties, marketing and advertising fees, as well as providing a financial overview.
Deciding the Right Time to Franchise Your Business
Putting together a successful franchise business can generate a steady stream of income for years to come, but it also involves up-front costs and efforts before even venturing into the lucrative field. There are many considerations and steps to take. Three primary areas of consideration are your business, your industry, and your goals. Ask yourself:
Do you have experience with the business through at least multiple business cycles?
Do you have a documented system that does not have to be constantly “tweaked”?
Do you have a history of profitability running the business exactly as you would have franchisees run it?
Does profitability include compensation and profit for the franchisees?
Do you have a brand that is recognized in the area you want to sell franchises in?
What is the competitive situation? Is the market oversaturated?
Are there barriers to entry into the industry? What are they? How do you make it easier for franchisees to get through the barriers?
Is the industry changing? If so, will you be able to seize opportunities for your franchisees?
Are you able and willing to build the infrastructure needed to support franchisees?
Do you currently have enough trained people to operate a franchise?
Are you able and willing to reinvest franchise fees for a few years to build and support the system?
Are you able and willing to invest in research and development to keep your franchisees ahead of their competition?
Signs It’s Not the Right Time to Franchise Your Business
Perhaps the primary consideration is whether your brand is unique enough to be franchised. Your ego may tell you that what you’ve developed is something no one else has thought of, but that may not necessarily be the case. You need to do your research.
Other key signals that it might not be the right time to franchise your business include:
You lack sufficient capital to develop and support franchisees with relying on additional franchise sales
There are no barriers to entry or low barriers
You do not have a recognized brand
Any unit of the business is struggling; any unit, if paying all the fees you expect a franchisee to pay, does not produce enough profit to pay a reasonable return on investment and reasonable owner compensation.
You have not successfully duplicated success in multiple units
The business doesn’t have a good track record or reputation
Getting the Right Legal Guidance
If you are thinking of franchising your business, the best time to get legal advice is very early in the process. An experienced franchise lawyer can guide you through the process so that you are set up for success as a franchisor when you are ready to take that step. When the time comes, he or she can work with you to be sure you comply with all of the applicable laws and regulations.
Rely on the Bundy Law Firm PLLC
If you’re looking to franchise your business, contact the Bundy Law Firm PLLC immediately. An attorney can help you evaluate whether your product or service is ready to be franchised, and then guide you through every step of the process. The firm is honored to help clients nationwide with all their franchising questions and goals.