5 Questions to Ask an Aspiring Franchisor

Posted by Joshua Becker on Nov 3, 2011 in Blog | 0 comments

Joshua Becker, Esq.

Your client built a successful business and wants to franchise it. They come to you asking for information concerning the process.  You should ask several pertinent questions to confirm they are aware of complex regulatory issues surrounding the industry and have a plan to develop their business into a marketable franchise system.

1) Is your business truly a franchise?
The Federal Trade Commission defines a franchise as a commercial business involving: (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) a payment of at least $500 during the first six months of operations. Some business owners mistakenly believe they are a franchise.  Conversely, many definitional franchises are not complying with the regulations. An initial inquiry regarding the nature of the business may save your client significant time and money.

2) Do you have protectable trademarks, patents and/or copyrights?
Franchise systems are, simply put, a group of businesses operating under the same trademark and utilizing substantially similar methods of business operation. For a franchise system to grow, the aspiring franchisor must protect its most valuable assets—its trademark(s) and other valuable intellectual property.

3) Are you prepared to comply with federal and state franchise regulations?
The Federal Trade Commission and 14 states impose registration and disclosure obligations on franchisors. These state and federal laws require franchisors to prepare and provide Franchise Disclosure Documents (“FDD”) to prospective franchisees in a specific format including detailed information on 23 distinct items before any franchises can be sold.

4) Can you teach others to replicate the franchised business in other markets?
Aspiring franchisors must provide adequate training, ongoing support, and standards enforcement at every franchise location. You must be able to teach others the secrets of your success.

5) Do you have a plan to insure consistency and uniformity across your franchise system?
Franchisees often do not understand or are not willing to follow your required systems.  Uniformity and consistency in a system are paramount as successful franchise systems provide the same experience in every market.  You will need to prepare and enforce a robust standards compliance system.

Josh represents franchise clients in developing and revamping franchise programs, drafting Franchise Disclosure Documents, franchise, license, and development agreements and counseling franchisors with regard to the franchise sales process and regulatory compliance. He also advises franchisors with regard to all aspects of the franchise relationship, including operational compliance, enforcing system standards, default, termination, renewal, workouts, transfers, debt restructuring, acquisition of franchised outlets, sale of company-operated outlets and the sale of franchise systems. Josh prepares a broad range of agreements for franchisors, including asset purchase agreements, license agreements, assignment agreements, workout agreements, confidentiality agreements, promissory notes, fee deferral and/or abatement agreements, guarantees, termination agreements and renewal agreements.