What is Franchising?
Franchising a business is the process where business owners license the rights to operate their business to third-party operators. These owners (also known as franchisors) allow third-party operators (also known as franchisees) to use their rights, brands, logos, and business practices in exchange for a royalty fee and/or fixed price.
Roles in Franchising
Depending on whether you find yourself as either a buyer or seller in a franchise, there are many differences as to how you would normally approach a franchising situation.
Buyer
The franchisee is the person(s) that buys into an existent franchise. The franchisee, in addition to paying an initial fee to the franchisor, typically pays for training, equipment and other facets of the franchisor’s business. Franchisees generally also have to pay a royalty fee to the franchisor based on the earnings of the newly established franchise.
Seller
The franchisor is someone who is has a successful business and wants to create more streams of revenue while reaching a wider group of customers. In addition to adding more streams of revenue to their already successful business, a franchisor can look to franchising as a viable option for expansion and brand development.
Important Considerations in Franchising
Depending on whether you are the buyer or seller of a franchise, there are generally two main considerations that constantly come up when deciding to enter the world of franchising.
Should I buy a Franchise?
If you are looking to buy a franchise, the first step is to do as much research as you can on your prospective business. Many franchises have dedicated web pages with information for potential franchisees. Having this information will allow you to create a list of pros and cons of being a franchisee for that business – which should be an essential consideration in your franchise purchasing process.
Once you spent the time analyzing your potential franchise, find a business attorney that has experience with franchises. A good business lawyer will help you decide as to whether it would be a good idea to continue the process of purchasing the particular franchise you are attempting to buy into.
Should I start a franchise?
Franchising, as identified above, is a great way to expand your profits as a business. However, it is certainly not an easy decision that should be made lightly. Choosing to franchise your business may have many implications. For example, franchising too early can destroy your business while franchising too late can make you miss out on a large earning potential.
When considering whether starting a franchise is for you, it is recommended that you first look at the current market size to determine whether the market is ripe to allow another “you” to succeed. Once this is done, it is recommended that business owners consider their available time. When starting a franchise, it is important to ensure that you have enough time to train a franchisee in your business. When you have a franchise, the franchisees become an extension of your brand. If the franchise fails or doesn’t operate to the standards that you have already set for your business, it could wind up tarnishing your brand. This tarnishment could impact your ability to further enter the franchising world and could, potentially, significantly decrease the revenue of your original business.
Laws affecting Franchises
Federal Law
The Federal Trade Commission (FTC) requires all franchisors disclose and provide as much information as possible for the franchisee and the franchisor. Information, such as the background of the franchisor, how much the franchisee has to pay, and legal obligations that all parties must be accountable for are all common disclosures.
State Law
State regulations for franchises vary from state to state. Some have stringent franchise laws, which can make it almost impossible to start a franchise. Ensuring you are aware of which state regulations apply to you increase the chances that your business will be able to comply with the laws of your state.
Intellectual Property Law
Intellectual property plays a very significant role in franchising. As indicated above, when you franchise a business, you are granting the rights for another business to use your brand and logos. In addition to that, which are covered under trademark law, other intellectual property aspects could apply – should as the sharing of various trade secrets or ability to use the patents of the original business.
Advice: Going Forward
The best advice for both franchisees and franchisors? Contact a business lawyer with expertise in franchising. While many business savvy entrepreneurs can effectively save money on legal fees when it comes to other legal needs, a franchise is an enormous undertaking that could lead to many implications.
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Julian Cordero is an Attorney, Music Producer, and Entrepreneur. Oh and he blogs too! Julian is licensed to practice law in New York and is the Managing Member of Cordero Law LLC, a New York City based law firm focusing on Business Law, Entertainment Law, and Intellectual Property.