Here at Franchise.Law, we represent franchisors. In a franchise situation, franchisors are the “bigger” company in the equation and franchisees are the “smaller” party. McDonald’s Corporation is a franchisor, so a person who buys a local McDonald’s would be a franchisee.
We work to help existing franchisors with all their operational legal needs, any expansions, and even the creation of new franchises. On the litigation side of our practice, we represent franchisors in federal and state courts, enforcing their franchise agreements and defending against lawsuits. At Franchise.Law, we are not just your lawyers, we are your partners in building the business you envision.
The Federal Trade Commission (FTC) regulates franchising on the federal level. The Commission created the franchise rule over thirty years ago, and it is now the Amended FTC Franchise Rule. This Rule is the groundwork for all franchising in the United States.
Additionally, there are 14 states with their own state franchise laws, and they vary, but they are generally in line with the FTC Rule. However, there are 27 other states that have business opportunity laws that further regulate this type of venture, but in certain states franchises are exempt from these processes.
North Carolina has a Business Opportunity Act, meaning that if someone sells their business in North Carolina, and the buyer plans to make money off of that business, it generally constitutes a business opportunity. If the franchisor is selling a business that uses a federally registered trademark, that franchise is exempt from registration in North Carolina in deference to the FTC rules.
There are 14 registration states with each one having its own comprehensive franchise act. It is important to note that in those states, someone cannot simply start selling a franchise. They must first register their franchise with the state prior to sale. There is often a fee that is required with the application.
The state may make comments or object to certain parts of the franchise disclosure document drafted before the sale. The state may deny the franchise opportunity for any number of reasons. If the state believes that the franchise is illegal, the application will be denied. This differs from non-registration states in that once the federal requirements are met, there are generally no further barriers to selling the business.
There are very subtle differences between a license and a franchise, and if someone is considering licensing their business, they need to be very careful that they are not accidentally creating a franchise. Licensing allows someone to use intellectual property, like a trademark, for monetary gain provided royalties are paid. Conversely, there are three specific elements under the FTC Amended Franchise Rule that make something a franchise. A commercial business arrangement is a “franchise” if it satisfies three definitional elements. Specifically, the franchisor must: (1) promise to provide a trademark or other commercial symbol; (2) promise to exercise significant control or provide significant assistance in the operation of the business; and (3) require a minimum payment of at least $500 during the first six months of operations.
Anyone who wants to franchise their business should have a federal trademark, an operations manual, and confidence that someone else could run their business without them. Of these, the operations manual is likely the most important part. Every business should be built as if it were going to be franchised, meaning that every business should have the systems and procedures in place to run like a well-oiled machine without the owner being there, operating the business every second of every day.
If a person buys a McDonald’s franchise, it will run just like every other McDonald’s because the franchise has significant predetermined systems and procedures. Without those systems, a business cannot be easily replicated, so the first and the biggest thing that is needed before franchising your business is to make sure that it has systems in place, and then those systems must be well documented.
The systems should be well-documented with as much information as possible so the business can be turned over to somebody and run with minimal support. The point of franchising is not to have someone else replicate a business and require constant advice and help, but to turn the business over to someone capable of expanding that company without the oversight required of a traditional expansion.
The Federal Trade Commission created the Amended Franchise Rule and has published many free resources for consumers as the FTC is a consumer protection agency at their core. There is the FTC Rule Compliance Guide that walks through all the requirements of the FTC Rule. There is also the North American Securities Administrators Association (NASAA) which puts out the Franchise Resource Guide. Depending on what a person is looking for, there are tons of resources in addition to just calling a lawyer and scheduling a free consultation.
Generally, when a business owner wants to expand their business without stretching themselves any thinner, franchising may be a good option for them. Franchising is really one of the very few ways that they can replicate their business and expand it quickly without putting extra stress and work on themselves as the owner.
Some people think about franchising their business before their first business is running. However, it is unwise to plan to franchise a business before it has found success as franchisees are looking for a proven and successful model to use.
To franchise a business, a franchisor needs a franchise disclosure document (called an “FDD”) as stipulated by federal law. This FDD is usually between 100 to 200 pages and will give the prospective franchisee all the information about the franchise opportunity that they need to be aware of before they buy the franchise. Franchisors may also be able to outsource the sales portion of their franchise to a developer or organization that specializes in such work.
It is essential to conduct a franchise feasibility study before a person considers franchising their business. They must determine whether their business model is financially sustainable for franchisees, including projected franchise fees, royalty fees, and marketing fees among other costs the franchisees will incur.
It is important to work with a franchise attorney or consultant to look over the business model and find out whether someone can buy this franchise, spend a ton of money to get it up and running, and then actually make money. If the franchised business is not profitable, nobody will buy it.
Once a franchisor has done that, they must begin the process of franchising their business. A lawyer will draft their documents and have an executive meeting that is anywhere from one to two days, usually in person, during which the lawyer will gather everything they need to prepare the franchise documents. Once the lawyer gathers all that information at the end of the executive meeting, then there is usually a turnaround time of about 30 to 45 days for the initial draft. After agreeing on a final document, and after registration if required, the franchisor can start selling franchises.
The difference between the FDD and the franchise agreement is that the franchise agreement is the actual contract between the franchisor and the franchisee. The FDD is a disclosure document that contains the franchise agreement as an exhibit, but it also has 23 “Items” ahead of the franchise agreement that explains, in plain English, the terms of the franchise agreement. Franchisors are required to follow many guidelines in explaining things to consumers so that the consumers are not signing a contract that they do not fully understand.
You took your business this far, but we know that you are only starting. Franchising your business is a great way to expand your brand, develop new revenue streams, and manage risk. The legal requirements and hurdles for creating a franchise should not be obstacles to your ambition.
Our experienced franchise lawyers could be the partners you need to ensure your franchise process runs legally, and smoothly. Call today to schedule a consultation and build your business’s future.