Franchising Your Business: Begin with the End in Mind
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(Currently Reading) Building a Rock-Solid FDD and Legal Foundation for Your Franchise
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Competitively Positioning Your FDD
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Adopting the Right Growth Mindset
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Winning Strategies for Franchising Your Business
- Steps for building a solid legal infrastructure
- Protecting your trademarks
- Choosing the right legal team
- Competitive positioning
Strategy #2: Building a Rock-Solid FDD and Legal Foundation for Your Franchise
In our Winning Strategies for Franchising Your Business series, we provide you with the inside track for building, scaling, and growing a winning franchise system. Winning strategy #1 was about mindset and Beginning with the End in Mind. Strategy #2 is all about building the right FDD and legal foundation for your franchise. Let's get started!
Steps for Building a Solid Legal Infrastructure
One of the primary goals every new franchisor should have in mind when franchising their business is to grow and scale it over time. Because of that, establishing a durable, protectable, and enforceable legal foundation is critical to the success of your new franchise – and attracting future investors.
Establishing a Franchisor Company
As a successful business owner, you’ve probably already gone through the process of incorporating at least one business. As a new franchisor, however, you should expect to incorporate and form a new, separate franchisor entity for your franchise early on in the development process.
That new entity will be the company that sells franchises, supports franchisees, receives initial franchise fees and ongoing royalties, and potentially protects your trademarks. As a separate entity, it will also help insulate your current business from potential legal issues associated with your franchise system in the future.
Protect Your Trademarks
A key part of selling franchises involves licensing your trademarks to franchisees for the purpose of operating their franchised locations. Because of that, making sure your trademarks are legally protected is critical.
However, guaranteeing that protection isn’t just about registering your trademarks with the U.S. Patent and Trademark Office – although that’s certainly an important part of the process. Protecting your trademarks is also about structuring your business in a way that insulates your franchise from potential legal issues in the future.
For some franchisors, that can mean establishing a separate intellectual property holding company that will license your trademark back to your franchise system. Because the needs of every franchise are different, it’s best to work with an experienced attorney during the trademark protection process to make sure your goals are met.
Develop a Strong Franchise Disclosure Document (FDD)
When dealing with private equity groups that are considering investing in a franchise, some of the most common questions potential investors have are centered around the legal infrastructure of the franchise system. They often have questions about whether the franchise’s Franchise Disclosure Document (FDD) is well-prepared, and whether its registrations are compliant with state franchise registration laws.
As a new franchisor, one of the most important steps you can take to ensure a sound legal infrastructure for your new franchise system is to work with a qualified franchise attorney to develop a strong FDD that effectively communicates the value of your business.
As one of the five essential documents needed to start a franchise, the FDD is a legally-mandated disclosure document containing 23 items of information about your franchise system. Under the federal Franchise Rule, franchisors are legally required to provide their FDD to prospective franchisees at least 14 days prior to offering or selling a franchise opportunity.
The purpose of the FDD is to provide potential franchisees with enough information about the franchisor to make an informed decision about whether or not to purchase a franchise from them. The disclosures included in the document range from information about the franchisor, its parents and affiliates, to financial data, fees, royalties, territory structures and more.
Because of its important role in both the franchise development and sales process, having a properly prepared FDD is critical. In order to make sure your disclosures are legally compliant, it’s important to work with both a franchise lawyer and an experienced accountant when preparing your FDD.
Make Sure Your Franchise Agreements are Durable
In the franchise world, franchise development companies sometimes make franchise agreements sound like a formality – as if they are simply a box to be checked off during the franchising process.
In reality, franchise agreements are important legal documents that establish the legal relationship between the franchisor and franchisee, including but not limited to fees, royalties, and each party’s legal responsibilities.
Franchise agreements can also be a critical asset for attracting future investors. When considering whether to invest in a franchise, private equity groups often have questions about whether the franchisor’s franchise agreements are legally sound and enforceable.
As a franchisor, it’s critical to work with an experienced franchise attorney when preparing your franchise agreements. This can help ensure your agreements comply with state and federal franchise laws and will protect the franchise system in the future while allowing room for future growth.
Choose the Right Legal Team
Whether you’re a small startup or the founder of a seasoned franchise system, building a strong legal foundation for your business depends on choosing the right legal team.
Make sure to look for a qualified franchise attorney backed by a team that’s trustworthy, forthcoming, and has experience not only in developing franchise systems but also growing and scaling them. When a legal team understands the pathway that can take you from a small business to a thriving multi-unit franchise system, they can help you plan ahead and avoid common obstacles and legal issues.
Following Best Practices
As a new franchisor, one of the most important things you can do for your business is to educate yourself about industry best practices. By competitively positioning your brand, making sure your business is legally protected, and evaluating everything that works in the franchise industry for startup franchisors, you can find ways to make those practices work for you.
To make sure your franchise is competitively positioned among its competitors within your industry, it’s critical that you evaluate what your business is about. Ask yourself questions about the qualities that differentiate your brand from competitors. What do your unit-level economics look like? Where do you operate? What are your territory sizes? What do your location demographics look like? Are your territories representative of the locations where franchisees will be operating?
In addition to evaluating your marketing efforts and financial performance including gross sales, costs, and competitive pricing, it’s also important to look at the details of your franchise system’s daily operations. What technologies do you use? What systems do you have in place for franchisees? How do they compare to your competitors?
Workable Legal Protections
In addition to making sure your FDD and franchise agreements are legally compliant and enforceable, it’s a smart idea to make sure those documents also include workable flexibility for future growth.
While any future changes you might make to your franchise system will depend on your industry and individual goals and needs, some examples might include reserving the right to add new vendors to your supply chain further down the road or to become a supplier yourself. Depending on your industry, you might even consider reserving the right to add a call center in the future as an added benefit for customers.
No matter what changes you decide to make in the future to grow your franchise, the most important thing is that your legal right to make those changes is built into your franchise’s legal infrastructure from the start.
Identifying What Works for You
Once you’ve gained familiarity with franchise industry best practices and legal protections, it’s important to use that information to evaluate your franchise system and identify any potential pain points.
As a franchisor, this evaluation can help you make changes to competitively position your brand in terms of initial franchise fees, FDD structure, multi-unit development opportunities, improved territory sizes and offerings, royalty rates and more – making your franchise more attractive to prospective franchisees and future investors.
Franchising isn’t a cookie cutter process, and what works for one franchise sometimes won’t work for another. If you’re looking for help with laying the right legal foundation for your new franchise, we can help.