Welcome to another week’s Play from my Small Business Legal Playbook. I hope the tips are helpful to you and your business, as these Plays are specially designed to give you a little insight on the legal side of running a small business. Today’s Play, “Franchise – Franchising Your Business” involves something several of my clients are familiar with: either opening a franchise of an established business (like a fast-food restaurant chain, or a postal business.) In Play 14 we discussed buying in to an established franchise model. In Play 15 we’ll discuss franchising your established business to someone else (or several someone else’s!)
So, what are the strategies I can recommend? First, you should make sure that the franchise business model makes sense to your existing business. Almost every person thinks that their business idea can make themselves money. A significantly smaller number of people think their business idea can make other people money, and in turn, make the original idea holder even more money. If you’re looking to franchise your business model to other people, you’re in the latter category. The benefits are clear: your established business model can be farmed out and other people can use that established business model to make you money, without you having to lift a finger. And the risks? Significantly less than if you were opening each of these franchises yourself. If it sounds too good to be true, you’re right. There are pros and cons to the idea of franchising your business model to someone else. We’ve already covered the pros, but here are some of the cons. While you’ve worked out the kinks and made a successful business, there’s no telling what someone might do with your business model. They might not be as successful as you are, and that can hurt the value of your brand. Your business model needs to be fool proof. Sure, there are McDonald’s and Subways franchises that go out of business, but they are far and few between. You have to protect the value of your brand, and that means you need to be very picky about who you allow to franchise your business. Once they’re operating a franchise of yours, they’re going to have the autonomy you might have relished for yourself, but in the hands of a stranger the prospect might give you nightmares. You might have a fool-proof system, but you have to make sure your franchisee follows that system to the letter. That’s why when you’re issuing franchises, make sure that you’re not expanding too fast, so that you can make sure that they’re following your system.
So, with that in mind, try and keep it from getting personal, even if this business model is your life’s work. As in my previous Plays, I try to separate the Play into Offensive and Defensive strategies, with Offensive strategies being proactive, and Defensive strategies being reactive. This week’s Play is concentrating on the Offensive Strategy.
Offensive Strategy: If you’re getting ready to sign a franchisor contract, first thing’s first. Make sure there is value in your brand, and make sure it’s protected. You should have your brand name registered as a trademark with the USPTO. You don’t want people opening non-sanctioned franchises of your business, and using the name that your franchisees are paying for the privilege of using. There are several key areas of concern that should be addressed in the process. Even before drafting the Franchise Agreement contract, first and foremost, you need to prepare an Operating Manual. This book will be the holy grail for your business. It will lay out, clearly, how the business must be operated and how your franchisee can stay in compliance with the contract. Second, that Operating Manual should be accompanied by a training program: so that the new franchise owner is trained in how to operate your business.
Finally, in your Franchise Agreement, the terms need to be clear: how does the franchisee comply with your terms so that everyone succeeds? Every successful franchise increases the value of your business model, and makes it more likely that others will want to franchise it as well. You need to make sure what kind of exclusive area your franchisee will be getting rights to as part of the contract. It also needs to be clear as to what you will be getting in terms of compensation for the franchise, and how often you will be compensated. The Franchise Agreement needs to be clear as to what happens if your franchisee doesn’t comply with the terms of the Agreement, or the Operating Manual, or is training staff in a way contrary to the guidelines set forth in the training program.
Then let’s talk about renewal terms: make sure they’re clear how and when your franchisee can renew.
These are just a few of the issues that arise when my small business clients are interested in creating a franchise model of their own, but these are some of the most important ones that I have come across.
Hope you enjoyed this week’s Play, and stay tuned for next week’s play from the Small Business Legal Playbook! Remember to subscribe and get each play sent to you directly! Until then, may your businesses continue to thrive and your football teams be victorious. Keep playing to win!