Five Tips to Franchising Your Small Business

Franchising your business idea can be a rewarding and lucrative enterprise. It can also be quite overwhelming. Between meeting the legal requirements and finding the right business partners, new franchisors can get lost in the weeds. To make matters worse, there are plenty of companies to take your limited capital, but few actually deliver what you need to actually start franchising.

This article will discuss five tips for starting the franchising process right.

1. Conduct appropriate market research and understand your competition. 

It is important to have a good understanding of the established franchises in your industry. Do research on your competitors. Embrace your similarities and determine the factors that set you apart. Franchises in different industries operate in different ways. For example, a restaurant franchise will be set up very differently than a house painting franchise.

Understanding your industry will be key in creating a business that is attractive to potential franchisees.  This research will help you form your business model, business plan, products or services, and will form the basis for your franchise agreement. 

2. Draft a compliant FDD and a helpful Operations Manual.

In most cases, you will need a franchise disclosure document, or “FDD”, to offer and sell franchises. The FDD will contain certain disclosures required by the federal Franchise Rule, enforced by the Federal Trade Commission. It will also contain certain state-specific amendments, if you are franchising in any states that demand it. If you do not have a compliant FDD, you may face severe legal consequences, including criminal penalties and civil fraud claims, for selling franchises. 

The FDD will also contain copies of your various contracts that a franchisee will sign when buying a franchise from you. These include a franchise agreement, amendments, and guarantees. These documents should be carefully drafted so that it is specific to your business, and strategic to your goals. 

The FDD is drafted by your franchise attorney based on your input and customary industry practices. A good franchise attorney will also provide feedback to you on what may or may not be industry terms and how to address the specific nuances of your business model. You will also decide on fees you will charge your franchisees. These include initial fees, such as franchise fees, royalty fees, and marketing fund fees and other fees that will arise throughout the franchise relationship, like technology fees, noncompliance fees, late fees and the like. 

Keep in mind that FDDs have an expiration date. Every year all FDDs expire 120 days following the franchising company’s fiscal year-end. Therefore, in order to continue to sell franchises, each year you must update your FDD, file appropriate state registrations (when applicable), and get an audit of the franchising company’s financials which must be included in the updated FDD.

You should also start writing your operations manual. This is a confidential document that provides your franchisees instructions on how to run their franchised business and how to sell the goods or perform the services you require. It contains your “secret sauce,” and other business secrets not available to the general public. You may also hire a consultant to write all or portions of your operations manual for your franchise opportunity.

3. Determine the appropriate sales strategy.

Decide early on your sales strategy, and the states where you will begin your franchise sales activities. Having a marketing plan will save you time and expense, and help focus your first efforts on a few target markets. 

It is important to keep in mind that certain states require additional registration before you can offer or sell a franchise in that state. This process may take several months to complete. If you are planning to sell in these registration states, you will need to plan ahead. Importantly, do not disclose your FDD to any prospects who either reside in or intend to open a franchise in a registration state until you are notified by your attorney that you are registered to sell your franchise in that state. 

Illegally selling franchises can result in high fines, being barred from selling franchises in that state, lawsuits, and even criminal penalties. Talk to your franchise attorney early about your franchise sales strategy, so that appropriate filings can promptly be made. 

4. Keep proper books and records.

It can be difficult and overwhelming to keep up with different aspects of your business. It is important to prioritize keeping good financial records, even when using an accountant. You are required to obtain an audit of the franchising company’s financials on an annual basis. Having good records may reduce the time and cost required to complete the audit.

As you are selling franchises, it is important to properly prepare and execute the franchise agreement. You may need the help of your attorney if you are unfamiliar with the document or the legal timelines for disclosing and signing a franchise agreement. If a franchise agreement is not properly executed, it may not be enforceable and could present issues later on. 

It is also important to keep good records of all executed FDD receipts and franchise agreements. It is advisable to keep a hard and electronic copy of your receipts and franchise agreements. Franchise agreements are valid for many years, often 10 years or more. It’s hard to enforce a franchise agreement if you can’t find the original agreement.

5. Properly evaluate your first franchisees.

As an owner of a start-up franchise company, it is tempting to start selling franchises to anyone willing to buy one. However, your first few franchises are the best marketing tools you have. In fact, your franchisees (whether happy or unhappy) must be listed in your FDD. Many potential franchisees contact your current (or former) franchisees to obtain information about you and your franchise system. 

Most prospective franchisees have never been a small business owner, and may not have the requisite qualities to operate a good franchised location. Therefore, it is important to do your due diligence and properly evaluate potential franchisees before signing any agreements. This should include performing a background check, obtaining financial records, and requiring them to undergo specific training before opening the franchise business. Accepting unqualified franchisees may result in longer opening times for the franchised business, premature closures, serious noncompliance with the franchise agreement or standards of operation, and other legal issues that could hinder your franchise’s growth.

There is no guaranteed formula for business success. However, starting with a solid foundation can certainly help! Set yourself up for success by utilizing thoughtful, strategic planning combined with solid support from your experienced franchise counsel. 

The contents of this article do not constitute legal advice nor does it create an attorney-client relationship with Canada Lewis & Associates PLLC. You should discuss your situation with an attorney whom you have engaged to perform legal services for you. If you wish to retain the services of Canada Lewis & Associates, please contact our office for more information.

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