Discover the essential building blocks of a successful franchise system.
KEY TAKEAWAYS:
- Franchising a business is a legal process that requires careful attention to federal and state-specific regulations.
- As a new franchisor, starting with a legal-first foundation built on compliance, structural fit, key performance indicators and industry knowledge is critical.
- By understanding the building blocks of a successful and compliant franchise system, franchisors can position their emerging brands for success.
Whether you’re in the process of franchising your business or preparing to become a franchisor, how can you know if you’re doing it right?
Often, the answer comes down to learning the foundational building blocks of a successful franchise system. For new franchisors, that means taking a legal-first approach to franchise development while focusing on structural fit and brand performance. It also means taking the time to learn about regulatory compliance and the franchise industry to ensure that your brand is on sturdy ground at every stage of your franchising journey.
In this article, we’ll explore the five fundamentals every new franchisor should know – and share tips for getting them right when franchising your business.
What are the fundamental building blocks of a franchise system?
In the franchise space, starting with the wrong foundation can leave your brand exposed to lawsuits and regulatory violations. Because of that, it’s important to learn the essential building blocks of a successful franchise system as a new franchisor.
1. Start with a Legal-First Foundation
Building a rock-solid legal foundation for your brand is a critical first step when franchising your business. From your brand’s startup documents to your operations, sales process and more, ensuring that your franchise system is legally compliant is critical for long-term success.
When building a legal-first foundation for your brand, consult a franchise attorney to address key topics including, but not limited to, the following:
- Corporate structure. A franchise attorney can ensure that your brand’s corporate structure – including your new franchisor entity – is legally sound.
- Franchise Disclosure Document (FDD). An important legal document mandated by the federal Franchise Rule, it’s critical that your FDD complies with federal law.
- Franchise documents. Your franchise agreement should be prepared or reviewed by a franchise attorney to ensure legal compliance
- Trademarks. Your brand’s trademarks and intellectual property are critical for growth, so it’s important that they’re protectable and properly registered with the U.S. Patent and Trademark Office.
- Other exposure. A franchise attorney can offer advice for limiting your brand’s exposure to future lawsuits and regulatory violations.
To avoid being taken advantage of as a new franchisor, do due diligence when it comes to establishing your brand’s legal foundation – especially if “one-stop-shop” consultants offer legal services without the proper training or licensing to do so.
2. Structural Fit
When preparing your brand’s legal documents, it’s important that their contents align with your offering. For example, if your brick-and-mortar restaurant’s FDD looks more like a professional services brand, that misalignment could create future risks – so it’s best to get it right from the start.
When thinking about the structure of your FDD and legal documents, consider the following:
- Brand category. Is your brand a brick-and-mortar retail business, a mobile service-based business or something else?
- Industry. What industry does your business operate in, and does your FDD’s structure align with that space?
- Opportunity profile. Does your brand offer part-time supplemental income or income replacement? What economic and lifestyle advantages does it offer franchisees?
- Territory structure. Are your franchisee territories designed for mobile services, or are they fixed around brick-and-mortar locations?
By working with a franchise lawyer, you can ensure that your legal documents and FDD are competitively positioned and aligned with your offering to avoid getting “stuck” in the sales process later.
3. Core KPIs
As a new franchisor, benchmarking your core KPIs can help you get a clearer picture of your brand’s performance. The data can also help your franchise attorney, developers and other experts make recommendations for protecting or improving your business.
Core KPIs that new franchisors should pay attention to often include:
- Initial franchise fees. An upfront fee paid by new franchisees, initial franchise fees help defray the cost of selling franchises and providing initial training and support.
- Royalties. Recurring royalties cover the cost of operational support and improvements to the franchise system. Royalties are sometimes based on gross sales, fixed minimums or hybrid formulas.
- Local marketing. These funds support local marketing for franchisees.
- Brand development fund. A general fund that franchisees pay into, this pool is often used to improve the brand through advertising and other initiatives.
- Item 19. To avoid running afoul of regulators, franchisors must avoid making financial performance representations to candidates unless those representations are first disclosed in Item 19 of their FDD.
By tracking, measuring and evaluating your brand’s core KPIs, you can support franchisees’ success while telling candidates a more compelling economic story about your offering.
4. Franchise Sales Compliance
The franchise sales process is regulated by franchise laws at the federal and state levels. Because regulations vary widely between locations, it’s important to work with a franchise attorney to ensure compliance wherever you offer or sell franchises.
In franchise sales, compliance in the following areas is critical:
- FDD. Before an FDD is issued, it must comply with federal and state regulations. Franchisors must also deliver their FDD to prospective buyers in compliance with such laws before offering or selling a franchise. Additionally, a franchise agreement cannot be signed, and no franchise fees may be paid by a candidate, until the FDD waiting period expires.
- Registrations and deadlines. In addition to federal requirements, certain states, called the Franchise Registration States, require FDD registration with a local authority.
- Other regulations. Seek the advice of a qualified franchise attorney to discuss additional regulations governing franchise sales wherever your brand operates.
Compliance is critical for your brand’s long-term growth. Before offering or selling a franchise, consult a franchise attorney to ensure compliance with all federal and local state franchise laws.
Need help with franchise sales compliance? Check out FranIQ.
5. Understanding What Comes Next
Having your FDD issued is just the beginning of your franchising journey. To understand what comes next when growing and scaling your franchise system, it’s important to get involved in the franchise space and learn about your role as a franchisor.
To prepare for the next phase of your journey, consider the following:
- FDD disclosure. Be prepared to properly disclose your FDD to candidates in compliance with federal and state laws, including waiting periods.
- Initial franchisees. Your first several franchisees are critical for validation and future sales, so it’s important to over-support their success with robust training and communication.
- Identify opportunities. Build a compelling brand story and sales website, attend industry events, join broker networks and gain business acumen from workshops and develop a five-year success plan.
As a new franchisor, learning about the franchise industry and planning for the future are effective ways to prepare for what comes next as you grow and scale your brand.
Recap
For new franchisors, starting with the wrong foundation can expose your emerging brand to future litigation and compliance issues. Because of that, it’s important to understand the fundamentals of building a successful franchise system before franchising your business.
By working with an experienced franchise attorney to create a legal-first framework for your new brand that includes a strong legal foundation, documents that are structurally aligned with your business, properly tracked core KPIs and franchise sales compliance, you can protect your brand and position it for success in a competitive industry.
Frequently Asked Questions
The foundational elements of a thriving franchise system include a legal-first foundation that is built on compliance, structural fit, core KPIs and industry knowledge. New franchisors can also benefit from understanding what comes next at each stage of their franchising journey.
The franchise industry is regulated at the federal and state levels, so it’s important for emerging franchisors to build a strong legal foundation for their business. By taking a legal-first approach to franchising, new franchisors can limit their exposure to lawsuits and compliance violations.
To prepare for future growth, new franchisors should seek the advice of an experienced franchise attorney to understand what comes next after their FDD is issued. They should also consider working with a reputable franchise developer to build a brand that can scale and thrive.
