When we talk with business owners, many times they have questions regarding what they should be evaluating and thinking about when they are planning on franchising. This article is designed to focus the business owner on whether they can or should franchise, and if so, what they need to be working on to get ready. Franchising is not a business tool that you can turn on high and be on your way, it takes scrutinization of your business as well as strategic planning well in advance of implementation.
Do the Checklist
The first step is to evaluate your business. You need to complete a brand checklist to determine whether or not your business is franchiseable. For a detailed checklist, please read our article titled “Can it become a brand?”, which discusses your need to scrutinize your businesses’ financial security, reliability, pricing, teachability, management, differentiation, flexibility, the industry conditions, return on investment, and your commitment level to the franchisees.
Protect Your Brand
Once you determine that your brand can be franchised, it is time to get to work. The very next step is to hire an Intellectual Property attorney to trademark your brand. We recommend trademarking the name and the service mark or logo. This step can be a very lengthy process because the United States Patent and Trademark Office takes an average of 18 months to complete a registration. However, before filing, make sure that the mark is well researched by an experienced attorney to ensure that the mark is available and strong enough. Many good “sales” names are too generic to qualify as a mark under the legal guidelines. Remember one of the main items you will be selling is your mark, so take time to ensure that it tells the right story. Take for example “Roosters®” a local business in town. When you hear “Roosters®” doesn’t it make you think of breakfast? Well it did me too, unfortunately, it is a mens barber shop. I would argue that the name is not a big help in the sales department, so keep this in mind when choosing a name. The name will actually affect the franchisee’s potential sales as well as yours. The good news is that you are protected once the mark is filed, so you do not have to wait until the actual registration is complete before you can start franchising.
Next on the list of to-dos is all the prep work, a.k.a. paperwork. During the 18 months of evaluation on your trademarks, you need to spend time with a qualified Franchise Attorney. This work may also take months, but will vary widely from client to client. The prep work consists of all the documentation that is needed in a franchise system. First, you will need to establish and write a legally sound operations manual. You want to require enough control that the franchisee will create a duplicate of your successful operation, however not too much control that their accidents or incidents could create legal liability for you or your company. Recent court decisions have held Franchisors liable for rather large amounts. One such court decision dealt with a franchisee that had placed a sign at the top of the stairs leading up to their restaurant. A customer climbed the stairs, and upon reaching the top of the stairway, stepped onto a platform then turned around to read the sign. After reading the sign the customer took another step toward the stairway, we assume they forgot they were there, and fell down the stairs. A judge held the Franchisor liable for the injuries to the franchisee’s customer. Why? Because the operations manual stated that the franchisor would approve the location of signage. The amount of the liability accrued to hundreds of thousands of dollars. We can not express enough how important ensuring that the Operations Manuals are legally sound. There are many human resource type companies that can write the Operation Manuals for you, and even though they have a lot of experience, nothing can replace an evaluation by a qualified Franchise Attorney, which may potentially save you thousands of dollars in the long run. After the Operations Manual is done, or possibly concurrently with it, the Franchisor should next create all the business forms that the franchisees will be using. These include accounting and reporting forms, logs for advertising expenses, material order forms, whatever applies to your business.
While the prep work is being completed, business and marketing divisions must start concentrating on the desirability of the franchise. They have to determine, what segment of the business community will you market this franchise to? What skills did the Franchisor possess when they started the business that made it thrive? Were those skills essential or could they be replaced by other business skills? Was the location or geographic area important to the success of the business? All of these and many other questions must be answered before a powerful marketing approach is achieved. Once you have a “business attribute file” for the prospective franchisee, stick to it when you start selling franchises. Do not sign with any franchisees that do not fit your desired profile. Remember, it was your attributes that made your business valuable. As a franchisor, it is your responsibility to create value for your franchisee. You will only be able to duplicate the value of your business if you couch it in the same attributes that you had.
Also determine if you are going to use franchise brokers. A franchise broker system can jumpstart your sales process. These individuals and companies match up prospective franchisees with the right franchise system based on the prospective franchisee’s disposable investment, business background, interests and area of the country. The brokers will typically charge you a flat fee or a percentage of the sales price for brokering the deal.
Now that you have all your paperwork completed in a blue line (last edit version) give it all to a full-service Franchise Attorney. A good franchise attorney will evaluate all of the documents that will be given to franchisees. They will create a red-lined version (with proposed changes) of all the areas that need changing for legal reasons. It is best to sit down with your franchise attorney, so they can explain the reasoning behind the changes. After learning about your franchise, through the operations manual and spending time with your training staff, the franchise attorney can then competently start creating the legal documents necessary for you to start offering your franchise to potential franchisees. There are at minimum three documents most franchisors want: the Franchise Disclosure Document (required by federal law); the Franchise Agreement (the legal contract between you and your franchisee) and an Area Representative or Master Franchisee Agreement (which allows for larger territory sales or area development arrangements). Once all the legal documents are finalized, you are ready to begin franchising.
Good luck! If Shelton Law & Associates, LLC can be of any assistance, please give us a call.