Franchising works, but does it work for you?

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We have all been to a McDonald's, Taco Bell, or other franchised restaurant.  No matter where you go, a reliable menu is waiting in familiar surroundings.  These systems are examples of an established business model where independent business owners buy the rights to operate their restaurant with the look and feel of any other restaurant in the system. But franchising is not just for fast food.  Franchised businesses are responsible for $2.31 trillion which represents 11.4% of the total private sector output in this country and up to 40% of all retail sales!  Franchises come in all sizes and flavors - I have personally represented casual dining restaurants, a dog training business, an educational learning center, health club, and other systems.  You can find franchises is just about every industry operating in the U.S. today.  So franchising clearly works.  But will it work for you?

A franchise is born whenever a business relationship meets three criteria:

  1. The right to use a trademark or trade name,
  2. Some type of marketing plan or system created by the franchisor, and
  3. A fee paid by the franchisee.

The parties cannot opt out of the franchise regulation; if you meet the three-part definition, you have a franchise and must comply.  Failure to follow the rules can result in fines and other penalties.

Here is an example:  I was speaking with a business owner who has been operating for several years and has established two successful locations.  He was interested in expanding, but couldn't find financing.  He was approached by entrepreneur who was interested in opening a few other locations based on the established name and concept.  The store owner was willing to grant the entrepreneur the right to use the name of the business, but he expected some type of payment for that right and he wanted to make sure that the new stores would be run in a similar fashion to his since he spent years developing good will with his customers.  It sounds like a win-win situation: the business is expanding, but the business owner does not have to put out the capital to open the additional locations, and the entrepreneur is leveraging the proven model into starting his own business.

However, it is not without concerns.  Franchise regulation is neither a simple nor inexpensive process.  And while many successful businesses have enjoyed rapid growth through franchising, you must have an understanding of the definitional requirements, particularly if you are trying to avoid falling under the regulatory umbrella.  The franchise laws and regulations control the process of selling franchises - everything from the initial meetings, to signing the paperwork, to operating.  And the rules were rewritten last year, making the current state of the law even more complicated.

But before you launch into franchising, consider the following:

  • Is the business franchisable? Many businesses are prime candidates for the franchise model, but others are not.  Franchises exist in almost every industry from food and retail to auto parts to education to professional services.  But a business built around a person's unique personality, for example, may not be reproducible elsewhere.
  • Is there a need and is the business scalable? You may be able to keep up with current demand by producing your product in-house with a solid team.  But will the need grow with the increased availability of your product or service?  A healthy franchise system will require an exponential growth in the delivery of raw materials or other services underlying your business.
  • Are you ready to give up "your day job"? Whatever business you were in before you decided to franchise, you are now in the business of selling franchises.  Creating and maintaining a franchise system requires a full-time effort and attention to business and legal issues surrounding your own company and the needs of your franchisees.
  • Are your finances in order? Franchising is a great way to develop a system using other people's capital.  However, there is still a significant capital requirement to get up and running and to provide continuing support services to your franchisees.
  • Where will you franchise? State laws will require that you have a franchise plan before you start talking with prospective franchisees.  Failure to comply with state requirements could result in fees and other penalties.  Many franchise systems start in one state or a region and gradually increase their presence to avoid the financial and legal burdens of nationwide compliance all at once.

And of course, there are many more.  Franchising is a proven business development method that has helped thousands of businesses employ millions of workers.  Whether it is right for you will depend on many factors.  By consulting with experienced professionals like franchise lawyers, accountants, and financial experts, you can determine whether you are ready to take the next step for your business.