Four Things to Know Before You Franchise a Business
Congratulations – you’ve done it. You’ve built and sustained a successful business. Now you’re ready to branch out and make some serious money through franchising. Before you take this big leap, there are a few things you should know to help you beat the odds and become a successful franchisor in a business arena where four out of five fail within a few short years.
#1 Consider the three alternatives to franchising.
If you want to grow your business through others, you do have other options besides franchising in Colorado. You may wish to consider:
Licensing your business opportunity
This option may be a good alternative if you have no trademark, but you want to license others to establish businesses identical in operation to yours, but under their own names.
Licensing your trademark
In this instance, you have a trademark that you allow another business to use, but you provide absolutely no assistance to the licensee in setting up or operating their business. This can be a bit risky on both sides of the equation. You, as the trademark owner, effectively lose control of your brand. On the other hand, the licensee is paying for something that does not include anything other than a mark to help them be successful. It may be difficult to find a businessperson willing to pay a lot to enter this arrangement.
Establishing a no fee transaction
If you establish a no fee arrangement with a business, you can make money by selling products to your business associate wholesale. Or, you may choose to keep all sales yourself and make your associate a sales representative who earns commissions. The third way a no fee arrangement can work is by forming a joint venture and sharing profits with your associate with no one taking any other form of compensation.
#2 Understands what earmarks your business as a franchise to the FTC and what the penalties are for noncompliance with franchise laws.
The Federal Trade Commission (FTC) considers a business to be a franchise if the business arrangement meets these three criteria:
- You have licensed your trademark to a franchisee.
- You have significant control over the franchisee’s business operations and provide significant assistance to the business.
- Your franchisee is making payments to you in order to operate the business.
The FTC is vigilant in enforcing franchise law. Some owners attempt to sidestep the law through shady business practices and trickery, but the FTC has seen it all and does not hesitate to bring down the hammer on businesspeople who are effectively operating a franchise without taking the necessary steps to make it legally sound.
The penalties incurred for not following FTC regulations can be formidable and include:
- Fines that can run into the hundreds of thousands of dollars
- Instigation of a temporary or permanent ban from operating a franchise
- A freezing of the franchisor’s assets
- Criminal conviction and a prison sentence
The bottom line is, any plan to deceive the FTC is ill conceived. If you are franchising a business take the steps necessary to make it a legal arrangement and save yourself a lot of grief in years to come.
#3 To increase your chances of success, abide by these rules.
Franchising dates back to the mid 1800 or even earlier, but it has definitely come of age in modern America. With a broad track record of success across franchises in many diverse industries, the following ideas have emerged as solid indicators of a franchise’s future chances for success:
- Before opening the first franchise, the business has at least three years of successful business operations under its belt with multiple outlets under the original owner.
- There’s a thorough operations manual developed that documents every aspect of the business and how a franchisee should handle every situation
that could potentially arise.
- There are training manuals covering all aspects of the business and a
designated trainer other than the franchisor to carry out trainings with each
- Someone is hired to handle all marketing operations for the franchise and
make sure there is a professionally designed and federally trademarked logo.
#4 Hire a knowledgeable franchising lawyer to guide you through the process.
Hiring a qualified Colorado franchising lawyer well experienced in the nuances of FTC law is one of the best investments you can make. Your lawyer will be able to identify areas of potential difficulty in your franchising plan and help you make corrections before costly mistakes are made. In addition, your lawyer will help you prepare the complex franchising documents required by the FTC and manage filings for you. He or she will also be a stalwart ally in negotiations with franchisees and if the situation arises that you must defend your business system around a negotiation table or in court, your attorney will capably represent you and your business interests.
If you are considering franchising your successful Colorado business operation, contact the experienced franchise lawyers at Robinson & Henry in Castle Rock, Colorado. For a no cost, no obligation initial consultation, call 303-688-0944 today.