Key Considerations for Starting a Franchise Business

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Key Considerations for Starting a Franchise Business

Do you have a successful business that you think has the potential to be a franchise? There are some key considerations to starting a franchise business, which include:

Proprietary concept — the business should have a unique concept with long-term profit potential.

Standardized system — you will need to have a standardized system for operation that can be used in every business location. These include standard policies, procedures, training and other systems that can be replicated.

Easily transferable — most franchises do not require that franchisees have specialized knowledge. Instead, the success of the franchise relies on the initial training, adherence to a standardized operations system and ongoing support from the franchisor. If your business requires specialized knowledge, it may limit the potential pool of franchisees.

Identity — your business must be able to be clearly distinguishable in the marketplace, with unique trademarks and service marks for brand identity.

Intellectual property protection — you must ensure that your intellectual property is protected everywhere you do business. If your brand cannot be protected throughout the U.S. — or in overseas markets where you plan to operate — you limit your ability to grow.

Experience — to help you sell franchises, your business must have a proven track record and you should have experience in running the same business that others who invest in your concept will.

Profitability — franchisees expect to make a profit from your concept and you need to demonstrate a reasonable rate of return in order to attract them.

Investment capital — you will need investment capital to start your franchise. The amount you need will depend on your concept and your system.

Legal — as a franchisor, you will probably want to create a new legal entity to protect other assets from liability. Beyond that, there are regulatory requirements in operating a franchise. You must have a Franchise Disclosure Document (FDD) that is provided to all potential franchisees and includes all disclosures required by law. You will need an Owners Agreement that includes confidentiality, non-compete, transfer restriction and personal guaranty provisions. You may need a Development Agreement if you plan to let franchisees operate multiple franchises in a geographical area. In addition to all the documentation, you must learn about state and federal laws pertaining to the operation of a franchise.

Financial statements — in the FDD, you must provide potential franchisees with audited financial statements that have been prepared by an independent CPA.

Marketing plan — not only will you need a marketing plan to help you sell your franchises, you will also need a marketing plan as part of your Operations Manual for franchisees.

Franchise law can be complex. Skilled representation is necessary. Williams Mestaz, L.L.P., is a law firm with decades of experience in business and employment law, business divorce, and high stakes litigation. Contact us at (602) 256-9400 and schedule a time to meet with us today.

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