Have questions about franchising? We have the answers

Franchising is a way to expand your brand to multiple locations by granting others (the franchisees) the right to open a business under your brand name, in exchange for fees paid to you (the franchisor). Franchising is regulated by state and federal laws that govern the offer or sale of franchises and the relationship with franchisees.

More specifically, franchising is the business relationship between a “franchisor” (the party that owns the brand name and is granting the franchise) and a “franchisee” (the party that is obtaining the right to use the brand name at another location). The franchisor permits the franchisee to sell certain products or services to consumers under the franchisor’s brand name in a way that’s consistent with the franchisor’s operating standards, and in return, the franchisee pays fees to the franchisor. The franchisor licenses its brand name (which may include trademarks, copyrights, and other intellectual property) to the franchisee and provides site selection, training, marketing, and other support services to the franchisee to help the franchisee succeed in operating his or her outlet and grow the brand as a whole. In return, the franchisee pays to the franchisor one-time and periodic fees (e.g., an initial franchise fee for training, weekly or monthly royalties based on sales, marketing fees, and technology and support fees).

A franchisor is the owner (and often creator) of a brand and business model, and acts as the licensor in a franchise relationship granting a franchise to a franchisee. The franchise is the legal right to operate the same business, under the same brand name and using the same business model, at another location, which may be down the street or across the country.

From a legal perspective, the definition of a franchise requires 3 elements:

1. a right to use a trademark (whether or not registered) granted to a franchisee,
2. fees paid by the franchisee to the franchisor, and
3. a marketing plan or community of interest in promoting the products and services between the franchisee and franchisor.

The franchisee is the local operator of the business that buys the franchise rights to operate the business at that location, in exchange for paying fees to the franchisor.

A Franchise Disclosure Document (FDD) is a document that summarizes key aspects of the franchisor and the franchise system, and includes copies of all form agreements that a franchisee would sign with the franchisor.  State and federal law require that the FDD be given to any prospective franchisee before they buy the franchise or sign any binding contracts.

The FDD includes 23 “items” required by law:

• Item 1 (Franchisor Description): This section summarizes the history of and the relationship between the franchisor and its parents, predecessors, and affiliates.
• Item 2 (Management Team): This section provides biographical and professional information about the officers and directors of the franchisor’s management team.
• Item 3 (Litigation): This section discloses certain current and past criminal and civil litigation for the franchisor and its management team.
• Item 4 (Bankruptcy): This section discloses whether the franchisor or any member of its management team has declared bankruptcy.
• Item 5 (Initial Fees): This section discloses the initial franchise fees that a franchisee must pay to the franchisor to buy the franchise, and the range and factors that determine the amount of these fees.
• Item 6 (Other Fees): This section discloses all other recurring fees or payments that a franchisee must pay to the franchisor, such as royalties, marketing fees, technology fees, and training fees.
• Item 7 (Initial Investment): This section presents, in a table format with low and high ranges, the estimate costs that a franchisee will incur in building out and opening its location.
• Item 8 (Restriction on Sources of Products and Services): This section discloses the restrictions that the franchisor has established regarding the source of products or services that a franchisee may purchase for use in the business.
• Item 9 (Franchisee’s Obligations): This section provides a reference table that provides cross-references to sections in the Franchise Agreement that obligate the franchisee to do or undertake certain obligations.
• Item 10 (Financing): This section describes the terms and conditions of any financing arrangements, such as installment payments or equipment loans, offered or arranged by the franchisor for franchisees.
• Item 11 (Franchisor’s Assistance, Advertising, Computer Systems, and Training): This section describes the services that the franchisor will provide to franchisees, including pre-opening assistance such as training and ongoing assistance.
• Item 12 (Territory): This section describes any exclusive territory granted to franchisees.
• Item 13 (Trademarks): This section discloses the primary trademarks, service marks, and other trade names that franchisees are licensed to use.
• Item 14 (Patents, Copyrights, and Proprietary Information): This section discloses the patents and copyrights that franchisees are licensed to use.
• Item 15 (Obligation to Participate in the Operation of the Business): This section describes the obligation of the franchisee to participate in the actual operation of the business.
• Item 16 (Restrictions on What the Franchisee may Sell): This section describes what goods and services franchisees may offer its customers.
• Item 17 (Renewal, Termination, Transfer, and Dispute Resolution): This section summarizes, in a table format, under what circumstances a Franchise Agreement can be renewed or terminated and a franchise can be transferred or sold to a third party, as well as what rights a franchisee has when it has a dispute with the franchisor.
• Item 18 (Public Figures): This section discloses what public figures (such as public persons or celebrities) it uses to offer or sell franchises, and the amount the franchisor pays these people.
• Item 19 (Financial Performance Representations): This section allows—but does not require—the franchisor to disclose financial information such as gross sales, expenses, and profits of its company-owned locations or franchisee-owned locations.
• Item 20 (Outlets and Franchisee Information): This section lists, in a table format, the locations of company-owned outlets and franchisee-owned outlets, as well as information on when these locations opened, closed, or were transferred.
• Item 21 (Financial Statements): This section includes audited financial statements for the past 3 years.
• Item 22 (Contracts): This section includes forms of all contracts that a franchisee is expected to sign, including the Franchise Agreement and any licenses or leases from the franchisor.
• Item 23 (Receipts): This section includes a receipt that prospective franchisees are required to sign acknowledging that they received the FDD.

Franchising takes time, money, and ‎a commitment to your franchisees. Your franchise system must be registered in certain states, and in all states, you must provide a detailed Franchise Disclosure Document to franchisees, along with having contracts in place with franchisees. Franchising is a different business than the one you are operating today—rather than selling products and services directly to consumers, you are now selling ‎franchises (and everything that goes along with a franchise, including the brand, system, and ‎guidance) to potential franchisees, who then in turn sell products and services to consumers. Your consumer is now the franchisee. ‎Learn more about the pros and cons to franchising.

Not every business can (or should) be franchised. For some, it may be premature to start franchising. But others businesses that have certain characteristics may be ripe for franchising. Determine the franchise feasibility of your business with our Fit to Franchise assessment and then contact us for a complimentary Initial Franchising Consultation.‎

Yes. State and federal law require you provide prospective franchisees a Franchise Disclosure Document (FDD) before they buy the franchise. Some states also require the FDD be registered with the state before being used. The FDD will include a copy of the Franchise Agreement and ancillary contracts. The franchisee has a certain amount of time to review the documents, and after that, you can sell them the franchise (e.g., sign the Franchise Agreement and ancillary contracts and receive any initial franchise fees).

The Franchise Agreement may prescribe the grounds for which you can terminate a franchisee. Before you can terminate a franchisee, under many state laws and the Franchise Agreement, you must first provide the franchisee a written default notice and opportunity to cure the default in a certain period of time. After termination, you will need to ensure that the former franchisee complies with all post-term obligations, including payment of all outstanding amounts, de-identification of the business (such as removal of signs and branded items), and return of all confidential information including the operations manual.