Mitchell J. Kassoff, Esq. is an attorney
who has been involved in the legal, business, litigation and corporate aspects
of Franchising in all 50 states since 1979.
For complete information about Mr. Kassoff and to read the articles that
he has published in Law Journals and other periodicals see www.franatty.cnc.net/curricul.htm. Mr. Kassoff provides complete legal and other
assistance for all areas of Franchising. For complete information
concerning Franchising see www.franatty.cnc.net.
Unlike other attorneys and law
firms who engage in many areas of the law, Mr. Kassoff only engages in
Franchise Law. Which attorney or law
firm would you want to represent you and your interests, an attorney or law
firm which splits their interests and attention among many areas of the law or
Mr. Kassoff who spends his entire time exclusively on Franchise Law? In addition, unlike franchise companies and
many other attorneys, Mr. Kassoff represents both franchisors and franchisees
in Court throughout the entire
In conjunction with franchising businesses, Mr. Kassoff prepares, files, registers and protects a franchisor’s trademarks and copyrights. Mr. Kassoff can file your business as a corporation or LLC in the state of your choice. Since Mr. Kassoff deals exclusively with franchise matters, he can also handle all matters that concern your franchise system of every kind and nature. Mr. Kassoff can also take care of all legal matters of your franchise system, leaving you to be able to concentrate on the business aspects.
Most non-litigation work can be done by Mr. Kassoff on a flat rate basis. This will enable you to know your entire cost before you decide to proceed.
Franchising is an excellent way to increase your profits, much more rapidly than if you expanded on your own. As a franchisor, you will have franchisees, people who own their own business, working for you. Therefore, your franchisees will have every possible incentive to work extremely hard to make their business a success.
There is no legal requirement for a prospective franchisor to have a working store or business that he wishes to franchise.
The advantage of franchising is that the franchisee provides all of the
money, the management and takes all the risks.
You as the franchisor typically receive $15,000 to $50,000 as an initial
franchise fee, plus a continuing royalty, usually in the amount of 10% to 15%
percent of the gross income of your franchisee.
This allows you to finance the growth of your franchise system through
advertising and marketing at the expense of your franchisees. The
usual term for a franchise is ten years, providing a steady stream of
royalties.
There
are two possible methods of starting a franchise system. The first method is to have a Franchise
Disclosure Document (formerly called a Uniform Franchise Offering Circular or UFOC)
prepared and registered in your home state.
This will allow you to sell franchises in the states listed in the next
paragraph (“Partial Registration”).
The second method is to have the Franchise Disclosure Document
registered to enable you to sell franchises in all fifty states and
Depending on various factors, the approximate states a Partial Registration will cover is Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Georgia, Idaho, Kansas, Kentucky, Louisiana, Massachusetts, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Vermont, West Virginia, Wyoming and Washington, D.C. Some of these states will require registration as a franchise or business opportunity if a franchisee is provided with estimates, projections or promises as to earnings, income or profits, an agreement to repurchase the franchise, assistance in providing or establishing retail locations or accounts, vending machines, rack machines or other equipment for the sale of goods or services, assurance that there is a market for the goods or services to be sold or other items.
The states that are included in a Partial Registration will vary depending on several factors. These include the case where the franchisor has a federally registered trademark or a large net worth. In both of these cases the number of states that do not require state registration and would therefore be included in the Partial Registration will increase and the number of states that require registration will decrease.
The only advantage of a Partial Registration is that you can begin franchising with a lower initial cost. The problem is that if you are not registered in a state from which someone wants to buy your franchise, you cannot even offer to sell a franchise to this prospective franchisee. The advantage of a Full Registration is that you will be able to sell franchises to whomever contacts you.
If you wish, you can do a Partial Registration plus selected other states. Please note that this will be more expensive in the long run that doing a Full Registration from the start. The reason is quite simple, when a Full Registration is requested an assembly line is made for all of the states, which is far more efficient. You receive the benefit of this efficiency by obtaining a lower cost per state registered.
If you sell one franchise this will, in most cases, cover the cost of a Partial Registration. If you sell two franchises this will, in most cases, cover the cost of a Full Registration. In most cases, the sale of the next franchise will put you in a profit position as to the cost of franchising. For both cases, the calculation is over the life of a franchise. If you do not feel that you can sell at least two franchises, then you should not consider franchising your business.
Prior to the advent of the Internet, franchises were typically sold first locally, then regionally and then nationally. With the use of the Internet being virtually universal, at very little cost you can set up an Internet web page (or simply add a button to your present web page stating to click it if the viewer wishes to purchase a franchise) showing the benefits of someone purchasing a franchise from you. Therefore, your receipt of inquiries for the purchase of a franchise will emanate from the entire country. An analysis of this data shows the importance of a Full Registration to avoid the forfeit of sales of your franchise and the more rapid expansion of your franchise system.
In fact, while a slow, careful
and conservative approach in limiting your franchise registration to the
Partial Registration states might be prudent in many areas of business,
paradoxically in franchising your business it is actually a very risky method
of operation. Quite simply, many (if not most) of your potential
franchisees are in the very states (which constitute far more than half of the
population of the
You should note that there is a long lead time to have all of the registrations of the various states accepted. This can range from weeks to months. The time is measured from when you have provided all necessary information, executed all necessary filing forms, all necessary documents and they have been filed with the appropriate state agencies. This lead time is a factor to consider as to whether you should immediately proceed with a Full or Partial Registration. The problem arises when you receive a call from a prospective franchisee from a state in which you are not registered to sell franchises. Even if your registration documents are immediately filed with that state, by the time the government acts and your registration is approved you will have lost that franchise sale. Considering that the sale of that one franchise would most likely have financed the difference between a Full and Partial Registration, the cost of the Full Registration is not as great as it might seem and is much more cost effective.
After considering the information stated above, Mr. Kassoff invariably receives the question from a prospective franchisor “should I do a Full or Partial Registration.” Based upon the information that you have read, it should be clear that a Full Registration would be the smarter alternative for you to maximize your profits.
For a Full Registration arrangements can be made to pay part of the legal fee with a series of weekly post-dated checks that will be paid out over a period of several months. This should alleviate part of the burden of immediately proceeding with a Full Registration.
The procedure to start your franchise system is that you inform Mr. Kassoff of your concept of your proposed franchise system. Mr. Kassoff then prepares a contract based on your ideas using the knowledge that Mr. Kassoff has obtained from what has been successful for other franchisors. You will receive a proposed franchise agreement for your review within ten business days from the time Mr. Kassoff has received the information that he has requested from you concerning the contract. After you approve the contract, you will receive a proposed disclosure within ten business days from the time Mr. Kassoff receives the information that he has requested from you concerning the disclosure. You will receive all information by e-mail. You will review the documents and send your comments, additions and deletions to Mr. Kassoff. You are entitled to any number of drafts until you are completely satisfied with the contract. Since the work is done on a flat rate basis, you can be certain that you receive exactly what you want without worrying about the time that Mr. Kassoff is spending on your work.
In many cases (if you are located in a non-registration state) you will receive the Franchise Disclosure Document and can begin franchising within three weeks from the time that Mr. Kassoff receives the information that he requests from you. If you are in a registration state, this will depend on how long it takes the state employees to process the request, which is typically a few months for most states.
As to registration, it is Mr. Kassoff’s obligation to have the state accept your registration. If for some reason a state does not accept the initial submission, Mr. Kassoff will make all changes required until the registration is accepted. Your flat fee covers all of Mr. Kassoff’s work until each state accepts your registration. By working in this method, all the risk is mine to insure that your registration is accepted.
Unlike many attorneys and others who deal with franchising, Mr. Kassoff does not have any hidden or “extra” charges. What most people fear when working with attorneys is that when billed on an hourly basis they (a) do not know how much they will pay and (b) they are afraid every time they communicate with an attorney it will cost them money. Mr. Kassoff’s Flat Rate Franchise Disclosure Document Fee includes everything to have a Franchise Disclosure Document prepared and registered in the states that you specify.
Please note that there is a long lead time to have all of the registrations accepted. This can range from weeks to months. The time is measured from when you have provided all necessary information and executed all necessary filing forms. Based on this lead time it is suggested that if you are serious about franchising you consider beginning the registration process as soon as possible.
Mr. Kassoff knows what has and what has not worked based on the more than 25 years that he has been franchising companies. This information and experience is used for your benefit to maximize your profits.
In addition, unlike franchise companies and some other attorneys, Mr. Kassoff does not provide “cookie cutter” franchise documents. Each document is designed for your particular business. Consider if you would like a young paralegal making decisions about your entire future or an attorney with more than 20 years experience. Finally, would you like some paralegal advising you as to all of the complex legal questions that you will incur throughout the years, or an attorney who actually litigates these matters in Court?
Legal Fee to Start Your Franchise System
Multiple drafts of the Franchise Agreement and the Disclosure Statement will be prepared and sent by e-mail to you until you are completely satisfied with their format and contents. Only then will the payment for these documents will become due. The legal fee for the Partial Registration is $30,000, plus the filing fee charged by your home state and disbursements, which range from $0 to $1,500 depending upon your home state. The cost for the Full Registration is $75,000, which is an all inclusive no additional charge fee for Mr. Kassoff’s legal fee, the filing fees charged by the various states and the disbursements. The Flat Rate Franchise Disclosure Document Fee is paid ½ upon Mr. Kassoff being retained, ¼ when you approve the Franchise Agreement and ¼ when you approve the Disclosure Statement. This fee is based on the display of my banner on your web site with a hot link to my web site. These fees also include answering all of your questions regarding franchising by e-mail for the calendar year in which the documents are prepared.
For your information, the fee for a large law firm to perform this service is more than double Mr. Kassoff’s fee. Since Mr. Kassoff’s overhead is far less than a large law firm, he can perform higher quality services at a lower legal fee. You also have the knowledge that Mr. Kassoff is personally performing your work for you, not some clerk or newly minted attorney.
There
is an old saying that you get what you pay for.
The paperwork is only a part of the services that Mr. Kassoff
provides. An important part of the
services provided by Mr. Kassoff is the ongoing assistance on a real-time basis
to insure that you are protected from litigation to the maximum extent
possible. This assistance is of a
significant benefit, which greatly amplifies the value of Mr. Kassoff’s
services.
Once your Franchise Disclosure Document is prepared, to sign up a franchisee all you need to do is to fill in the franchisee’s name and address at the beginning of the Franchise Agreement and have him sign on the last page. Therefore, it is cost free to sign up each additional franchisee.
You should note that the sale of only one franchise will (in many cases) pay the entire legal fee over the term of the franchisee’s contract with you.
If you
e-mail (franchiselawyer@verizon.net)
or telephone (973-762-1776, Monday through Friday
There is no charge if you wish to discuss your franchising concept with Mr. Kassoff by telephone.
You should be advised that due to Mr. Kassoff’s nationwide franchise law practice he does not physically meet with 90% of his clients. In these days of e-mail, faxing and Federal Express it is simply not necessary. However, should you desire a meeting it can be easily arranged.
If you wish to meet with Mr. Kassoff at his office there is a $500 charge for the meeting, which is payable at that time.
If you
wish, you can meet with Mr. Kassoff at the hotel located on the grounds of
If you wish to have Mr. Kassoff to meet with you at your office or premises there is a $1,000 charge for this meeting, plus the charge for travel time at Mr. Kassoff’s normal billing rate and the costs of travel. This must be paid in advance of the meeting.
Many people [unsuccessfully] attempt to avoid the franchise laws by stating that they are selling “licenses,” “dealerships” or “distributorships.” Since there are steep legal penalties for the failure to follow the franchising laws, this is both a dangerous and expensive proposition that is self-defeating. This is especially true in many cases since the sale of one franchise can pay for the cost of a franchise registration, while the cost of defending and possibly paying the penalty for the failure to register as a franchisor will in many cases be a multiple of this amount. It is therefore Mr. Kassoff’s recommendation that you do not attempt to circumvent the law by not complying with the franchise laws and concentrate on selling franchises and profiting from the sale of your business concepts.
To give an example of one state’s law, the
following is a quotation from the
In
(a) A franchisee is granted the right to engage
in the business of Franchise Disclosure Document, selling, or distributing
goods or services under a marketing plan or system prescribed in substantial
part by a franchisor and the franchisee is required to pay, directly or
indirectly, a franchise fee, or
(b) A franchisee is granted the right to engage
in the business of Franchise Disclosure Document, selling, or distributing
goods or services substantially associated with the franchisor's trademark,
service mark, trade name, logotype, advertising, or
other commercial symbol designating the franchisor or its affiliate and the
franchisee is required to pay, directly or indirectly, a franchise fee.
Section 681.1.7 states that a
““Franchise fee” means any fee or charge that a franchisee or
subfranchisor is required to pay or agrees to pay directly or indirectly for
the right to enter into a business under a franchise agreement or otherwise
sell, resell or distribute goods, services, or franchises under such an
agreement, including, but not limited to, any such payment for goods or
services.
Section
681.1.18 states. “In any proceeding under this article, the burden of
proving an exemption or an exception from a definition is upon the person
claiming it.”
Before you are allowed to sell a franchise you are required to have a Franchise Disclosure Document prepared. This is a package conforming to federal and state laws that contains numerous specific disclosures regarding you and your company’s history and operations, financial statements and your Franchise Agreement. In addition, the Franchise Disclosure Document must be registered in many states prior to selling your franchise.
You are not permitted to offer or sell a franchise without first taking the steps stated above and then giving a Franchise Disclosure Document to a prospective franchisee prior to having him sign any documentation or taking any money from him. If you fail to follow these steps, you are subject to serious financial liability.
Your Franchise Agreement will specify your concepts, methods of doing business, what you offer the franchisee and what the franchisee is obligated to perform. Naturally, it will also state the upfront franchise fee and the percentage of the gross sales that your franchisee must pay to you.
In addition to
receiving money from your franchisees, you can receive a percentage of gross
sales of your franchisees for advertising purposes. In effect, your franchisees will be paying
for you to expand your franchise system.
It should be noted that a significant part of Mr. Kassoff’s law practice is suing and defending franchisors. When he prepares the Franchise Disclosure Document for his clients he utilizes this knowledge to minimize the legal risks of his franchisors. This is something that no corporate attorney, franchise company or franchise consultant can do.
With the Internet you will find that by placing a button on your Web site “Click here if you are interested in purchasing a franchise” that in many cases prospective franchisees will contact you. This is obviously done at little cost to you and is a most effective way of obtaining franchisees in many cases. Based upon this, in many cases you will find that you have no need of Franchise Consultants, Advertising Consultants, Franchise Companies or any similar type of business. The amount of money that you will save by not having to use these companies will pay for a Full Registration, effectively making the legal cost to franchise free.
Mr. Kassoff does not make disparaging comments about anyone else that provides franchise services. The following is to respond to what some franchising companies say.
Franchise companies state that they provide business and marketing advice. You should note that your work is not done by an attorney who specializes in franchise law, it is done by a clerk. Franchise companies state that franchise attorneys do not provide business and marketing advice. This is true regarding many franchise attorneys. However, since Mr. Kassoff has been involved with franchising since 1979, this does not apply to the services that Mr. Kassoff provides. Mr. Kassoff’s services do include marketing and other business considerations into the documents and communications with you. This includes the business and marketing ideas that Mr. Kassoff has found have worked throughout the years, as well as avoiding ideas that have not worked.
Franchise companies do not provide appropriate, timely and crucial legal advice as to how to keep you and your franchise system out of trouble and/or litigation. This is crucial since franchise law is constantly evolving, which requires continuous monitoring by a franchise attorney expert. Franchise companies cannot do this for the simple reason that the people who work with you are clerks, and not attorneys. Therefore, you are basing your entire financial future on the work of clerks who have no formal legal training.
Franchise companies provide legal documents (on a cookie cutter basis), not documents or legal advice crafted specifically for you and your franchise system. To provide the proper franchising protection for your company goes far beyond the preparation of the documents (which Mr. Kassoff prepares specially and uniquely for you), since this is only the beginning of what must be done. A franchise attorney watches the legal rules, regulations, statutes, laws and cases on a month-to-month basis to protect you and your business. Franchise companies cannot do this since they do not employ attorneys to work on your matters. Just losing one case in Court because your work was not kept current with the changes in the law could cost you hundreds of thousands of dollars.
Franchise companies will tell you that they do both the legal work (which is not done by attorneys) and marketing (which is done the same way for each customer by clerks). You would be far smarter to have an attorney do your legal work and at the beginning engage in your own marketing to save a considerable amount of money. Mr. Kassoff will inform you how you can market your franchise at minimal cost. After time passes, then it might be appropriate to have someone handle your marketing. However, in many cases, you will never need an outsider to handle your marketing, which will greatly increase your profits. This is especially true in the Internet age where prospective franchisees will find you on the Internet. By proceeding in this manner you maximize your legal protection and marketing resources.
Some franchise companies will not even tell you what they will charge you to franchise your company. They might tell you how much they charge for a legal drafting fee; however, they will not tell you what the other costs are. If you want to find out how much you will have to pay them to franchise your company you have to pay them to go to their seminar. Mr. Kassoff’s charges are clearly stated herein.
Some franchising companies will charge a fee in excess of $100,000 (plus disbursements which can exceed $25,000) to do a full registration and the services that Mr. Kassoff provides. After the franchising company drafts the franchise agreement it will ask you to submit it to your attorney for his review and approval. This means that you will have to locate and retain an attorney at your cost to review the franchising company’s work. Obviously, this is not the case for the services that Mr. Kassoff provides.
If you want clerks to determine your future then this is your choice. Since the law on franchising is changing on a monthly basis, if you do not have an attorney who specializes in this work you can end up in serious trouble that can not only cost you hundreds of thousands of dollars, but might even jeopardize your entire franchise system. Quite simply, if you want someone who is a legal expert in both the corporate and litigation aspects of franchising, a franchise attorney, not a franchise company, will best support your needs and maximize your profits.
If you are reading this, it took time and a lot of hard work but you are finally beginning to reap the rewards from the business you started on your own. The brand name you coined is now recognizable. Because of the success of your first location, you may have opened branches in other locations. You have established a degree of loyalty among your customers, who come back to your place of business on a regular basis. Some of them have even inquired if they can become a franchisee of your business.
OTHER PEOPLE’S MONEY, PEOPLE and TIME
The main advantage of franchising for entrepreneurs is that it allows you to
use other people’s time, other people’s people and other
people’s money in expanding your business.
MONEY. Instead of
continuing to expand your business by investing money from your operations or
by borrowing from the bank, you can expand using franchisees”
capital. Franchisees put up most, if not
all the money required to open a franchised outlet.
PEOPLE. Franchisees make the best
managers of outlets. They have much more
at stake than a professional manager because they’ve invested their
money, maybe their life-savings, into the business. Franchisees are a motivated
lot.
TIME. Franchising allows you to
expand quickly. Since the entrepreneur
is not limited by how much money he has to expand with, or who will manage the
additional outlet, he can expand very rapidly.
This is very important specially if the product or service is new and you
need to open many outlets in order to establish the market lead (just look at
the pearl shake phenomenon).
OTHER BENEFITS
Other people’s Money, People and Time are the main advantages. However, it does not stop there.
When you have a network of outlets franchisee- and company-owned, your
collective buying power increases.
Because of the buying volume under your disposition, you can get more
discounts, rebates and supplier contributions (to your advertising budget, for
example). These savings can in turn be
shared with your franchisees.
Since franchisees contribute to a system-wide advertising fund, the advertising
financial burden is shared among outlets.
The Royalty you collect also contribute to expenses you used to shoulder
on your own back when you only had company-owned outlets. For example, improving your product through
Research & Development does not have to be an expensive proposition.
When done properly, franchising can result in tremendous profits! There are many possible sources of
revenue. However, these revenue streams
must continue to result in a win-win formula for you and your franchisees.
Once you have mastered the skill of running a franchise operation, you can
continue your expansion overseas (watch out, McDonald’s!).
To summarize, franchising has grown because it results in many benefits to
those who have used it properly.
Q: Why should a company consider franchising its business?
A: These are some of the advantages of franchising:
A: Will my business succeed as a franchise?
Q: Of course, there is no simple, foolproof formula. However, based on substantial experience dealing with companies large and small, Mr. Kassoff can suggest some generally applicable answers.
The 5 Factors for Franchising Success
Certain factors are present repeatedly in businesses that succeed in franchising. Although no company should expect to have all of these factors, the more you possess, the greater your chances of success. Can your business succeed in franchising? Here are the 5 factors for franchising success:
If your industry is relatively untouched by centralized decision making and is the domain of small, independent operators, then you have a distinct advantage. Many of the giants of franchising, such as McDonald’s, AAMCO, Holiday Inn and 7-11, provided cohesion and organization to just such industries.
In franchising, novices must quickly learn to operate an unfamiliar business system. The easier that system is to learn and implement, the better the odds for both franchisor and franchisee success.
Franchisees require one thing above all else - the ability to make money. Can your business give them this opportunity? Is it profitable enough for both you and the franchisee to share in the wealth? These are basic questions in the franchise success formula.
The initial investment requirements must be reasonable in order not to strap new franchisees for working capital. Remember, franchisees have to finance the business start-up plus a few months” expenses while the business is getting established. The franchisee’s initial investment must be reasonable in light of the necessities of the business and its profit potential.
Service businesses offer franchisors many advantages that businesses in other sectors of the economy do not possess. They often require a modest capital investment to establish, maintain and provide the degree of adaptability that franchisors often need to succeed in today’s turbulent business environment. Many successful franchises are therefore in the service sector.
Q: What are the Characteristics of the Franchisable Business?
A: 1). The Market Will Accept Its Product or Service.
The franchise either will offer new products, better versions of old standards, or will develop new formats or strategies for the sale of established products or services. Overall, there must be a market for the product or service.
2). There Must Be a Prototype.
Most successful franchises start with a prototype, or model unit upon which subsequent ones are based. They are invaluable in establishing the legitimacy and profitability of your business and also serve as the experimental laboratory in which the business is developed and refined.
3). The Business Can Be Detailed.
Uniformity is critical to franchise success. Standardized operation increases efficiency and builds a single, easily identifiable image with which consumers can relate. In order to accomplish this, detailing of the business is a necessity.
4). You Must Be Able to Train Franchisees in a Short Period of Time
Education is time consuming and labor intensive and most franchisees cannot spare a lengthy time away from income-producing activities. To be successful, you need to train franchisees properly and get them into the field as quickly as is prudently possible.
5). You Must Be Able to Service Your Franchisees.
In order to develop a successful network, you as the franchisor must provide a variety of services. Therefore, in order to franchise, you must be willing and able to do this.
Q: Will you enjoy franchising?
A: Here are nine questions to ask yourself:
1. Do you work well with others?
One of the greatest skills you will need to succeed in franchising is the ability to work effectively with other people.
2. Can you accept and manage risk?
To franchise, you invest time and money in an endeavor which has an element of risk. You must be able to understand the nature of the risk and to manage it.
3. Are you single-minded?
The ability to stay the course and commit to the long term is a tremendous advantage in business and particularly in franchising, which is a long and involved process. The determined and focused franchisor is often the successful one.
4. Do you have a strong ego?
You must believe in your dream and have a confident personality in order to build enthusiasm and interest in others. Franchising is a high profile undertaking.
5. Are you a good salesman?
Salesmanship is critical to franchise success. After all, growth depends upon finding prospects and then selling them your business.
6. Are you a good communicator?
So much of franchising involves communication that a system that does not facilitate the free exchange of information is doomed to failure.
7. Are you an entrepreneur?
An entrepreneur sees potential where others see problems and opportunity where others see only obstacles. The entrepreneur identifies real needs in the market and commits the necessary effort to fill these openings.
8. Are you hard working?
Getting a franchise program off the ground is a significant undertaking. It takes time and effort, which translates into work.
9. Are you adaptable?
The ability to
adapt to constantly changing circumstances is a necessity in a multi-faceted
area such as franchising.
Developing the Franchise Package
While many fundamentals of most franchise systems are similar, the
differences in the franchise packages are as varied as the industries they represent.
However, certain factors are common to all franchise packages.
Franchisee qualifications. Who is qualified to apply for a
franchise? Each franchisor should have
set criteria for franchisees. Having this
list upfront will help an investor weed out franchises that do not match his
qualifications. Take note though that
qualifying for a franchise is not about the money. It is more about building a long-term
relationship with another entrepreneur and as such, characteristics like
integrity, passion for work, dynamism will come into play. In the case of corporations applying for a
franchise; it is good for a franchisor to meet all partners, even the
“silent” ones to ensure a smooth working relationship.
Franchise agreement. The most important document in the package is
the franchise agreement, for it will define the scope of the licensing,
allowable use of trade or service mark, the business format, the
responsibilities of both franchisor and franchisee, the policies of the company
and the duration of the contract.
This document will also bear the signatures of both franchisor and
franchisee, signifying their agreement in entering into the partnership.
Please note that the use of the franchisor’s brand name and logo
(service mark) is the main point of acquiring a franchise. Thus, it is key that the franchisor has them
registered to his name and is known as the undisputed owner of the
brand/trade/service marks.
The operations manual. The operations manual should contain in
detail the complete process for conducting the franchised business. As part of the franchise agreement, it should
specify the manner in which the business must be operated and specify which
tasks in the business’ operations are to be handled by franchisees and
which are responsibilities of the franchisor.
Procedures for reporting, recruitment, staff training and administration
to be used and followed uniformly by all franchisees should be included in this
manual, as well as information tackled during the training of the franchisee
management and staff.
Pre-opening support. Franchisees, as management trainees of the
business, will rely heavily on the expertise and guidance of the franchisor in
setting up and opening the franchise. As
such, the franchisor has to be clear as to how he intends to train and assist
the franchisee in finding a suitable site, looking over the leasing agreement,
constructing the franchise, training the staff, handling a soft opening and
operating the franchise. Apart from
stating the activities he will engage in during pre-opening, the franchisor
must give a time frame upon which the progress of the franchisee franchise may
be based.
Marketing plan. Franchisees expect the franchisor to have a
range of marketing materials and activities such as advertising, in-store
promotions and PR planned to help maintain interest in the brand. Since a marketing support fund (MSF) is contributed by all franchisees in the network from
their gross sales, it must be apparent to them that they will enjoy significant
benefits in comparison with independent competitors.
Ongoing support. Franchising is a long-term relationship and
as such it is important that the franchise package include ongoing support in
franchise operations, training, human resources, etc. Ongoing support should include venues for
discussing franchisee concerns such as regular meetings with the franchisor, as
well as a dedicated franchisee monitoring team.
Territorial protection. With regards to franchisees” locations,
the franchisor must be clear as to the boundaries of area of operations for
each franchise so that their franchisees would not be put in a position where
they are forced to compete among themselves.
The borders of each area or territory should be specified in the
franchise package. The franchisor must
assign exclusive rights to a particular territory within which no other
franchisee in the network may infringe.
It is also possible that the franchisee will not be assigned an
exclusive territory.
Franchisee benefits. The franchise package should likewise offer
the investor the advantages of being part of this particular franchise
system. Will they enjoy special
discounts from suppliers? Will they
enjoy some prestige or recognition for being part of your brand’s network
of franchises? Will they really enjoy
more time for themselves? Will they
benefit from continuous theoretical and practical training from the
franchisor? Such benefits can often
influence emotions or convince shrewd minds, so it is important not to leave
these out of the franchise offer.
Time frame. It is in the best interest of both parties
that a time frame for the franchise process be laid out at the beginning. In franchising as in most other things, haste
often makes waste, so it is better to stick to a slow but sure pace when
carrying out the franchise application process.
For first time franchisors, patience is not only a virtue; it could very
well be a business saver. Take time to
pick out and develop the first franchisee as this decision could often make or
break the venture.
Do not be greedy and keep accepting applications without qualifying your
franchisees. Remember that you have a
brand name and reputation to protect.
Based on the foregoing, begin to formulate your franchise package. Remember that the key is to give investors
evidence of their opportunity to make a decent living while enjoying the perks
of a turnkey business as well as camaraderie and long-term support from the franchisor.
Why Are Prospective
Franchisees Attracted to a Franchise?
One of the universal questions we all ask in the franchise business is, "Why are prospective franchisees attracted to a franchise." The obvious follow-up question is, "How can we attract more and better quality franchisees to our system."
New franchisees are attracted to franchising for a number of reasons. Though
these reasons vary from person to person, we've learned over the past 20 years
that most investors are attracted for one or more of the following:
Control Issues
Many prospective franchisees are driven by the frustration they've felt in past
employment situations where they didn't have enough control of their work
environment to influence results in the manner they desired. Perhaps they had a
micro-managing boss, a parent corporation that wouldn't listen, or something
comparable. In any case, they are drawn to the idea of being their own boss,
having the final say in relation to business decisions, and being able to
accept either the credit or the responsibility for whatever outcome their
business produces.
Economic Need
In the past 15 years, there has been an increasing trend in large corporations
to displace more experienced managers in favor of less experienced (and
therefore less expensive) workers. This dynamic has created a pool of
experienced managers in the 45 to 60 year-old age bracket who have found it
quite difficult to gain employment comparable to what they had before. In many
cases they cannot afford to retire and need to create a replacement income for
a period of time. More and more, these experienced managers are being attracted
to franchising as a vehicle to accomplish this goal without the fear of having
to go through another down-sizing again in the future.
Lifestyle Issues
Another major attraction for many prospective franchisees is related to lifestyle issues. We see a steady stream of potential investors who talk about their desire to reduce business travel, job-related stress and the number of hours they work per week. They often also want to find businesses with down times at certain points in the year so they can take more time off with their families or for other leisure activities. The advantage of franchising to these people is that there are so many options to choose from they are undoubtedly able to find an opportunity that matches their desires.
Investors aren't buying a business, they are
buying a result
Wealth Creation
Goals
Many prospective franchisees have figured out that though their work efforts
may be creating a significant amount of wealth, in most cases they are not
sharing directly in the wealth they are creating. They will put in their
40-plus years and then retire on whatever they've managed to save plus Social
Security. Many investors are attracted to franchising because they understand
that their efforts have the potential to create significant amounts of wealth
and they will be the ones who own the wealth that is realized when it comes
time to sell the business they've built.
Though there are other reasons that an investor might be attracted to any given
franchise opportunity, one or more of these four reasons will almost always be
present in the prospective franchisees your company is dealing with. In order
to best answer the second question posed above, "How can we attract more
and better quality franchisees to our system," it is necessary to seek
some additional information from the investor and have strong discipline in
your franchisee recruiting process.
In order to make your franchise more attractive, always start by asking a
prospect the reasons that they're interested in your franchise
opportunity. It could be one or more of
the reasons mentioned above or perhaps they have an entirely different
motivation for wanting to become a franchisee. In any case, you need to know if
you're going to make your company more attractive to them.
Spend some time exploring in detail their motivation for wanting to become a
franchisee. If it is not possible for them to achieve whatever their goal is
through your opportunity, the time to determine this is early on so you won't
waste time on a prospect who is never going to be happy as a franchisee in your
system.
Tailor Your
Presentations
Assuming they can meet their goals through your franchise opportunity, make
sure to stress whatever is most important to the investor during your
conversations in the investigation and research phase with this prospect. In
other words, if they are very focused on the economic need to get something
going soon and the wealth creation aspects of owning their own business, but
don't seem to care at all about lifestyle issues, tailor your presentations
accordingly.
You'll be showing you care about what's most important to them and that will
make your opportunity more attractive than someone else's who is not as attuned
to the priorities of the prospect. Never forget that investors aren't buying a
business, they are buying a result that they want in their life, so focus on
that result if you want to attract them.
The answer to getting better-qualified, new franchisees in your system is easy
to state but harder to accomplish for many franchisors. The answer is to have
the discipline to determine the characteristics that define an excellent new
franchisee for your system and then don't accept any candidate unless they meet
the definition completely.
This starts with financial qualifications such as net worth and liquidity, but
often goes into a number of other characteristics involving personality,
skills, attitudes and values. Many franchisors, especially fairly new ones,
think that they have to take anyone willing to become a franchisee in order to
produce growth.
If you're in this frame of mind, ask other experienced franchisors. Most have had to learn the hard way that a new franchisee who is unqualified or the wrong fit for a system is a nightmare far worse than simply having no new franchisee. Set your standards and you'll be a lot happier and more successful in the long run.
The
10 Commandments of Franchise Sales
Every successful franchise system has built its foundation
with several key components. One of the
essential building blocks is a franchise development program that effectively
finds and then convinces high-quality franchisees to join the system in a
manner that meets the company’s growth objectives without violating the
franchise sales laws.
Very few successful franchisors blame the franchise laws
for any failure to meet their franchise sales goals. Understanding what you can and can’t
say from a legal perspective simply is one part of the franchise sales
process. The franchisor and franchise
development professionals who know the legal aspects of franchise sales are
much better positioned to get the job done with remarkable results.
Those franchisors or development personnel who don’t understand
or disregard the franchise laws are headed for tough times. Even if they meet their development goals,
their foundation is cracked and likely will crumble at some point with
potentially devastating consequences.
This briefly addresses several of the important legal
issues that commonly arise in the franchise sales process. I refer to them as the 10 Commandments of
Franchise Sales. If you understand them,
embrace them and live by them, you will improve your chances for building a
successful franchise system.
1.
Thou shalt deliver a Franchise Disclosure
Document at the earliest of the first personal meeting
or 10 business days prior to signing an agreement or receiving consideration.
The Federal Trade Commission Rule defines a personal
meeting as one between a franchisor and a prospective franchisee which is held
for the purpose of discussing the possible sale of a franchise. The purpose of the meeting can be determined
by considering the following factors: who initiates the meeting; are fees and
initial investment expenses discussed; is any earnings claim made to the
prospect. Telephone, mail or e-mail
communications do not qualify as a personal meeting.
Franchisors often wonder if they need to disclose people
they meet at a trade show. No one hands
out a Franchise Disclosure Document to each person who stops at their booth for
the typical introductory conversation.
However, if you arrange for a follow-up meeting over a cup of coffee or
a more in-depth presentation in a separate meeting room, then you should treat
this as a personal meeting and deliver a Franchise Disclosure Document. Also, a franchisor’s tradeshow booth or
promotional hand-outs must not include any type of earnings claim, as the FTC
Rule defines that as a triggering event for disclosure.
Notably, the proposed revisions to the FTC Rule would
eliminate the first personal meeting requirement and simply require delivery of
a Franchise Disclosure Document at least 14 days before signing an agreement or
receiving consideration.
2.
Thou shalt not offer or sell a franchise in a
registration state without being registered.
Many franchisors want to jump the gun on responding to
inquiries by sending out promotional materials or a Franchise Disclosure
Document to any prospect regardless of whether the franchisor is registered in
the state where the prospect resides or wants to locate the franchised
business. A franchisor must work with
its franchise counsel to understand which of the 14 registration states may be
off-limits because the franchisor has not registered with the state. The franchisor also must know if an isolated
sale exemption is available because certain states will allow an isolated offer
or sale prior to registration with the state.
Further, because state laws are triggered with an offer, not just the
sale, the franchisor’s Web site should include disclaimer language that
explains that communications on the Web site are not directed to residents of
any states where the franchisor is not registered.
3.
Thou shalt not make any statements contrary to
information disclosed in the Franchise Disclosure Document.
This commandment sounds simple. Yet it is the easiest one to violate if a
franchisor does not insist that its personnel know and understand the
information disclosed in the Franchise Disclosure Document. In order to accomplish this objective, the
franchisor must coordinate regular meetings of its personnel to discuss the Franchise
Disclosure Document and its contents, to discuss how to respond to
prospects” frequently asked questions, and to insist that individuals
talk only about what they are qualified to discuss—you
don’t want your marketing representative discussing product
distribution/supplier issues during a Discovery Day.