We begin our list of franchise frequently asked questions with one of the most common questions we receive from prospective clients. Determining when to franchise your business begins by first evaluating your entire business operation — its products and/or services; staffing and management requirements; site and location requirements; equipment, fixtures and furnishings; employee training protocols; branding and trade dress; customer service; sources of supply; advertising and marketing programs; and other aspects of your operation. This will help you determine whether each component of your business has been fully developed and systemized to the extent that others can be trained to duplicate your entire system of operation in a reasonable time period and at a reasonable cost. This may be validated through the opening of additional company-owned locations that experience similar levels of success. The evaluation process should also include analyzing key competitors in order to identify your company’s unique attributes/competitive advantages in addition to determining whether other geographic areas are conducive for your products and/or services. Experiencing great success in a single market is no guarantee that the same level of success can or will be achieved elsewhere. A final step in the evaluation process includes determining whether the company’s current management team is qualified, willing, and able to assist franchisees in developing, opening and operating their franchise business. It is crucial to the success of the franchise company and its franchisees that the company’s infrastructure be designed to support the high levels of assistance, training and support that are required by franchisees. Please contact us if you would like assistance with evaluating your business operation in relation to franchise expansion.

Simply put, being committed to helping your franchises succeed is one of the biggest factors. In addition, providing franchises with a proven and profitable system of operation, training them to follow your system, and motivating them to perform at their highest levels are all huge factors in developing a successful franchise network.

Hopefully it is their CONSISTENCY in operating the business. You confidently expect that no matter which location you visit, you will receive the same experience every time. Which means that the franchisor focused on the top priority - training their franchises to operate the business according to the franchisor’s proven system and motivating them to do so. A few questions you should consider as part of your consideration in franchising your business are addressed in our 15 Key Questions Franchise Quiz, which we invite you to complete as an initial indicator as to whether your business is ready to franchise.

While it is impossible to guarantee a specific level of success, FranSource performs a great deal of due diligence prior to committing to developing a company’s franchise operation. We do so to ensure that our clients will be successful. For clients selecting our comprehensive Franchise Essentials Development Program, a portion of our development fee is directly tied to the sale of the initial franchises. With a personal stake in the successful launch of our clients’ franchises, we are very careful to only work with companies that we are extremely confident will be successful. From a statistical standpoint, research shows that new franchise companies grant approximately 5-7 franchises during their first 12 months of operation. However, this varies based on the total investment amount, the competitive nature of the industry, the success rate of the first few franchises, whether the company offers multi-unit franchises, the state of the economy, and other similar factors. For the majority of our clients, the first three franchises granted provide a total return on their franchise development costs and expenses.

The short answer is that low profitability or a lack of profitability does not necessarily mean that the franchise will be unattractive to prospective franchisees. However, there must be acceptable justifications as to why the business is generating a low, or no, profit. For example, if you incurred expenses beyond those expected for a typical franchise location, your financial statements may indicate this (if you elect to make “Financial Performance Representations” in Item 19 of the FDD). In fact, the FTC Franchise Rule permits franchisors to deduct expenses from their Financial Performance Representations in Item 19 when providing a Profit & Loss Statement that the franchisor reasonably believes franchisees will not incur, provided that proper disclosures are made in Item 19. Many franchise prospects will review the company’s Financial Performance Representations with their CPA as part of their due diligence. Their CPA will be able to advise them concerning the additional “non-franchisee related” expenses you incurred and the impact they have had on your profitability.

Under the FTC Franchise Rule, for the majority of states in the U.S., it is not necessary to have a federally protected trademark in order to begin franchising. The franchisor must simply disclose in the FDD that the trade name has not currently been registered with the United States Patent & Trademark Office (USPTO). However, when franchising, a franchisor is granting the franchisee the right to operate their business using the franchisor’s trade name. For this reason, it is important that the franchisor’s trade name(s) and logo(s) be federally protected, which requires registering with the USPTO. Since the process to register a trade name/trademark with the USPTO takes an average of one year to complete, it is important to commence registering the company’s trade name early in the development process. FranSource’s affiliated trademark attorneys can assist you in registering your trade name(s) and logo(s).

It is important to note that there are a handful of states that require a state or federally protected mark as a condition of being exempted from the state’s business opportunity laws. However, in lieu of an approved state or federal trademark, a franchisor may simply file under the business opportunity requirements of the state until such time as the trade name has been registered. Please contact us for additional information.

As previously stated, a successful franchise starts with a system of operation that is duplicable and trainable. In our experience, many independent businesses operate with little written documentation, so the best advice we can give is “write everything down.” This means documenting the processes and procedures required to successfully develop and operate your business in addition to preparing lists of equipment, fixtures, furniture, inventory and other required items. This does not mean you have to write a novel. What is important is that you have the basics of the system written down. This information will greatly aid you (and us) when you begin the franchise development process.

As part of our franchise development process, we advise clients regarding every term and provision that may be included in the Franchise Disclosure Document and assist them in determining all relevant terms and provision. In addition, under our Franchise Essentials Development Program, we begin the project by preparing a report of similar franchise concepts, which enables us to discuss specific terms and provisions of each competitor’s franchise offering with the client.

Ultimately, there are a number of variables that impact the amount of the franchise fee and royalty fee that are charged by a franchise company. They include the sophistication of the business system, the uniqueness of the business model, the length of the training program, the franchisor’s costs related to acquiring a franchise, the initial and ongoing training and support provided by the franchisor, the technology solutions that are used in the operations, and the potential return on investment and profit potential for franchisees. Additional considerations relate to supplies, materials, inventory, etc. that may be included with the purchase of a franchise, the type of advertising and marketing support provided by the franchisor on an initial and ongoing basis, and the size of the franchise territory being granted. FranSource advises and assists our clients in determining the appropriate fees based on industry research and a detailed analysis of the client’s franchise offering. Please review our blog, “Determining the Initial Franchise Fee” for additional information.

First of all, franchisee-initiated lawsuits are fairly rare when you consider the number of franchise companies and franchises that exist today. Second, the key to avoiding conflict and litigation is to do everything for a franchisee that you committed to doing in your Franchise Disclosure Document. Third, you must ensure you provide the training and support necessary to help your franchises be successful. If franchisees are making money, very rarely will they be tempted to initiate a lawsuit against the franchisor. In addition, care must be taken to ensure that your Franchise Disclosure Document is in compliance with all applicable state and federal laws and regulations. Failure to do so will make it easier for a franchisee to prevail in a case against a franchisor.