The Ultimate Guide to Franchising Your Business
New to franchising? Do you want to learn more about franchising your business, where to start, the steps, and how to know if you are doing it right?
In this guide you’ll learn franchising, how to franchise your business, and how to franchise the right way.
We’ll also take a deeper dive into the legal requirements for franchising, the steps involved, and tips on how to sell franchises.
Introduction: What Is Franchising?
Franchising is a legal and business relationship that can help grow your business.
A franchise is created by a legal agreement that involves the license of a trademark, the payment of a fee, and control over the operations of a business. When you franchise your business you’ll be creating the legal documents, pre-sale disclosures, and operational requirements needed to comply with the franchise laws and sell franchises to individuals who become your franchisees.
As a franchisor you’ll be granting franchisees the right to develop and open new locations using your trademarks, business systems, suppliers, training, and on-going support. Franchisees will pay you fees that include an initial franchise fee and on-going royalties and will invest the capital needed to open new locations under your brand. When done correctly franchising creates win-win relationships.
If you’re interested in franchising your business, you’re in the right place This guide will provide you with a detailed understanding of franchising, get you on the right track, and help you franchise the right way. If you’re concerned about doing it right and avoiding missteps, you’re not alone – we’re here to help.
Below are links to help you navigate through the topics covered in this Ultimate Guide.
Franchising is regulated and requires compliance with federal and state franchise laws.
The franchise disclosure document, also called the FDD, is the legal document you’ll need to sell franchises. It’s required by federal and state law and is the legal foundation for your franchise. You are required to give prospective franchisees your FDD no less than 14 days before signing any agreement with a franchisee or accepting any payments from a franchisee.
What’s in the FDD?
The FDD is broken down into 23 mandated sections with each section referred to as an “Item.” Each Item is intended to inform a prospective franchisee about you, your franchise, and the legal obligations between you and your future franchisees. This includes information about royalties, territories, start-up costs, and more.
Simply put, it’s all the legal stuff packaged up in one document before you can offer or sell a franchise.
Do I Have to Update My FDD Annually?
Yes. Your FDD has to be updated at least annually. In franchise registration states, the FDD must be approved and registered with state regulators before you can offer or sell a franchise in that state. There are also some states that require franchise filings or business opportunity filings before you can sell a franchise. Learn more about when an FDD expires and must be updated.
What are the Steps to Take to Franchise a Business?
When you franchise your business it means that you have taken the necessary legal and business steps to sell franchises, support franchisees, and grow your brand. First and foremost, your franchise lawyer will have to prepare and issue a Franchise Disclosure Document that complies with federal and state law. When dealing with states that require FDD registration and filings, you’ll also have to register or file your FDD with the state in order to be able to sell franchises.
The following are the steps to franchise your business:
- Determine if Franchising is Right for Your Business
Your business, business systems, and, personal goals need to align with franchising. When you franchise you’ll be responsible for recruiting, training, and supporting franchisees as your brand grows.
- Franchise Disclosure Document
Your FDD should be prepared to comply with federal and state specific franchise laws and should be specific to your business and the franchise that you are offering.
- Operations Manual
You will be providing a confidential operations manual to your franchisees. Your operations manual must document and inform you franchisees about all system requirements and information needed to develop, open, and operate the franchised business.
- Register Your Trademarks
You must register your trademarks with the United States Patent and Trademark Office. More about trademarks here and what could happen if your trademarks are not registered.
- Establish Your Franchise Company
You will need to establish a new franchise entity, typically a corporation or limited liability company. Your new franchise company will be in the business of selling franchises, supporting franchisees, and building systems to grow.
- Register and File Your FDD
Before you can sell franchises in franchise registration states (CA, IL, MD, NY, VA, etc…) or franchise filing states (FL, NC, SC, TX, etc…) you must file the appropriate applications and notices. Check out our interactive franchise registration registration map to learn more about state specific laws, registration, and filing requirements.
- Create Your Franchise Sales Strategy and Set a Budget
Even after your legal documents are complete, determining your initial franchise sales strategy and setting a budget is critical. Evaluate your target franchisees, target markets, interest in your franchise and a realistic budget for attracting, training, and supporting franchisees.
The franchise development process typically takes between 90- to 120-days to go from where you are today to being a franchisor legally able to offer and sell franchises. However, once you “franchise your business” you’re just getting started.
The answer depends on where you will be offering and selling franchises. At the federal level, the FDD is not registered or filed with a government agency. Although your FDD must comply with federal law and the Federal Franchise Rule, compliance is self-regulating, which means that it’s up to you and your franchise lawyer to make sure that your FDD is properly prepared and issued. At the state level, in the franchise registration states, your FDD must be registered with the designated state regulator before you can offer or sell a franchise in that state. In the franchise filing states, you must make certain filings with the designated state regulator before offering or selling a franchise in those states. In all other states, you may offer and sell franchises as long as your FDD is current and in compliance with federal law.
See in the glossary below for a list of the “franchise registration states” and the “franchise filing states” or visit our interactive franchise map to learn more about each state and its franchise requirements. Also, learn more about where the FDD gets registered and filed.
Typically, franchising your business takes from 90 to 120 days. Depending on unique factors related to your business or industry, there could be variations. A lot also depends on who you are working with and your internal team.
This ultimately depends on who you work with.
When evaluating the cost to franchise your business, it’s important to understand that, generally, there are two stages to the franchise development process:
Stage 1 – The Franchise Development Stage is the franchise development stage where you take the legal and business steps necessary to call yourself a franchisor and start selling franchises. During the franchise development stage, major milestones include developing and issuing your FDD, preparing your operations manual, and competitively benchmarking your franchise offering relative to your competitors.
Stage 2 – The Franchise Sales Stage is the initial franchise sales process over the next 12 months following the issuance of your FDD. During the initial franchise sales stage, you’ll be taking steps to sell franchises through different marketing channels including organic attraction, paid advertising, social media marketing, public relations, and franchise brokers.
What you’ll learn is that the franchise development process is an ever-evolving process that takes place over years as you continuously grow and improve your franchise system.
When we talk about the cost to franchise your business, right now we’re talking about the franchise development process (Stage 1) and this includes: (a) competitively positioning your franchise offerings and the underlying rights and obligations between you and your franchisees, (b) preparing your FDD and the entire legal infrastructure needed to become a franchisor and start selling franchises legally and the right way, and (c) the development of your operations manual. To get this done and, depending on who you work with and if you prepare your own operations manual, we’ve seen the cost range from $18,500 to $84,500.
What Determines this Big Variation in Price for Franchising Your Business?
It depends on who you work with and whether or not they are focused on a long-term relationship and honest pricing. Be very careful when selecting a lawyer or franchise developer. Many vendors rely on the fact that there are things that you, as a soon to be new franchisor, just don’t know about the process. Some vendors will overcharge you or, worse, they’ll under charge you without you realizing that you are not doing things the right way. Look out for “franchise developers” who claim to do everything in-house, including the legal preparation of your FDD. It’s illegal for a franchise developer to have their own “in-house” lawyer prepare your FDD. For many good reasons, including your legal protection, accountability, and the need to maintain attorney-client privilege, your franchise lawyer must be independent and directly retained by you. You need to know that professionally they stand behind the legal advice and guidance that they provide to you.
Lower-cost options ($5,000 – $10,000 range) will end up costing you more in lost opportunity and future franchise violations. On the opposite end, higher-cost options ($80,000+) oftentimes deliver a lot of “paper and forms” but really not much value.
Other costs include developing your operations manual. Many of our clients prepare their own operations manual. Most developers typically charge $15,000 – $20,000 for this service.
The Internicola Law Firm, P.C., charges from $18,500 to $34,000 for legal representation PLUS franchise development, planning, and support.
Tip: Do your research and look for transparency before engaging a team to develop your franchise. Ask for a detailed proposal and client references!
Learn more about the franchise development stages and how much does it cost to franchise your business.
During the franchise development stage, it’s important to consider and implement the following strategies and best practices:
- Set Realistic Goals.
Franchising is more of a marathon than a sprint. Set realistic goals as to what franchise success will look like for you. What are realistic sales goals in your first year and over the next two, three, four, and five years? The best time to start planning your five-year strategy is before you launch your franchise.
- Research Your Competitors.
You need to competitively position your franchise offering among your competitors. Within your FDD and franchise offering, you will be disclosing important cost metrics that include things like the initial franchise fee, the ongoing royalty rate, franchisee fee obligations, territory sizes, and a broad range of other legal and business factors that will influence the profitability of your franchisee’s operations and their overall rights. Evaluate your competition, understand their metrics, and work with your lawyer to ensure that your FDD is competitively positioned.
- Develop Your Franchise Offering for Both Individual and Multi-Unit Sales.
Having the ability to sell multiple franchise units to a single franchisee is important. What does this mean? Many times, franchisees want to acquire the right to develop and open multiple locations or operate in multiple territories. That is, they don’t want just one location or one territory. To be able to offer and sell both individual unit franchises and multi-unit franchises, your FDD must be structured to accommodate the sale of an individual unit franchise to a single franchisee. This is where the franchisee wants just one location and signs a single franchise agreement. If a franchisee wants to buy the right to open multiple locations, they are given a development agreement. They’ll also get a schedule that gives them a certain amount of time to develop their additional locations. We call this a “dual structure.” Developing this dual structure will mean more upfront planning and work, but for the vast majority of industries, launching your franchise without the option will cost you sales and put you at a competitive disadvantage in the long run.
- Make Sure Your FDD Is Compliant for Every State.
One of the most frustrating things for franchisors is being delayed and not being able to sell in their anticipated timeframe. From the start, your FDD needs to be multi-state compliant. This means it should be ready for registration and filing in every state. How to do this? As mentioned earlier, your lawyer needs to prepare your FDD on a “multi-state” basis. That is, your FDD should include – on a state-by-state basis – required addendums and modifications to make your FDD compliant with various state laws. This is especially important in the franchise registration states. Without this level of multi-state compliance, you risk compliance violations and potential roadblocks to future franchise sales.
- Learn Franchising and Get Involved in the Franchise Community.
Use this time to start learning more about the franchising process. Get involved in franchise events. While your franchise lawyer is developing your FDD, during your development calls and meetings he or she should also be helping you learn franchising and get you involved with franchise organizations, networking events, masterminds, and other professionals and suppliers that will be of value after your franchise launches.
Tip: Speak to other franchisors and always be thinking about next steps.
There are a lot of moving parts involved in selling your first franchise and building a pipeline for ongoing franchise sales. It’s critical to develop a marketing plan to cost-effectively sell franchises.
As you get started developing a franchise sales marketing plan, the following are some of the initial questions that you should be answering:
- What are my franchise sales goals over the next 6 to 12 months?
- What are the qualities and characteristics of my perfect franchisee?
- What is the value proposition of my franchise, what makes my franchise unique, and how can my franchise improve the lives of my franchisees?
- How much money am I going to invest in franchise sales over the next 6 to 12 months?
- What outside vendors should I be relying on to generate interest in my brand and to help me attract qualified franchisees?
- Does my website uniquely communicate my brand story and the advantages of becoming a franchisee in my system?
- Does my website include a lead capture form that encourages prospects to identify themselves and reach out for more information?
- Do we have a franchisee discovery and conversion process in place to inform and educate the prospect about our brand, the advantages of becoming a franchisee with us, and what success can look like for them?
The answers to these questions will allow you to start building the framework for your initial franchise sales marketing plan and the positioning of your brand. These questions are designed to get you started, and what you’ll find is that, over time, your answers to these questions will evolve, change, become more refined, and, ultimately, lead to many other questions and franchise sales development processes.
Next, we’ll dive a little deeper into positioning your franchise brand with the right value proposition. This is one of the most significant marketing tasks that you must engage in. Even if you are working with a marketing team, as the founder or leader of your franchise brand, you need to be actively engaged in this process or you risk making one of the most common and costly marketing mistakes that start-up and emerging franchise brands make.
Position Your Franchise Brand and Build a Franchise Brand Story
Before you spend money on franchise sales marketing, you must avoid this mistake: the mistake that we’re going to tell you about is not only made by emerging franchisors but also large franchise brands and even franchise marketing companies. This mistake will cause you to waste your marketing dollars, lose franchisee conversions, and make bad decisions about the effectiveness of franchise marketing channels available to you..
You may think that this mistake is basic and obvious, but it’s not. In fact, this mistake is made by a majority of franchisors and is the reason why the marketing for so many franchise brands – no matter their industry – sounds the same. While the larger franchise brands have the money to get away with making this mistake, start-up and emerging franchisors like you do not. That’s because your marketing budget is limited and your marketing dollars need to produce results during the emerging phase of your franchise system. You would think that franchise marketing companies would help emerging franchise brands avoid this mistake – but they don’t. In fact, many times they help to perpetuate it.
So What’s the Mistake?
The mistake is that emerging franchisors like you start spending money on marketing – whether pay-per-click ads, franchise sales web portals, joining broker organizations, attending trade shows, etc. – without spending the time to develop, understand, and communicate their brand story, the value proposition that their franchise system offers to franchisees, and why, for the right franchisee, their franchise is unique.
If you make this mistake, your marketing dollars will be wasted on cookie-cutter “me too” franchise sales marketing campaigns and media that will either not work or, at best, result in unaffordable franchisee conversion ratios and costs.
Developing your brand story and a unique value proposition for your franchise brand takes time, so get started now. If done correctly, you’ll magnetize your marketing that attracts qualified franchisees. For additional information about positioning your brand, we strongly recommend that you read Building a StoryBrand by Donald Miller and that you check out the StoryBrand workshops.
Evaluate These Franchise Sales Marketing Channels
Once you have established the value proposition of your brand and created your brand story, start evaluating these franchise sales marketing channels. Some of these channels may be right for your franchise and some may not. Ultimately, you can’t rely on just one, and we recommend you develop a good mix of what works for your brand, your industry, and your franchise sales goals.
- Franchise Brokers and Broker Organizations
Franchise brokers and broker organizations are an important part of the franchise sales process. Franchise brokers are typically part of larger professional organizations and they assist prospective franchisees in finding a franchise opportunity that matches their interests and available capital.
Advantage: The advantage of working with franchise brokers is that good brokers and organizations typically produce qualified franchisee prospects who close deals.
Disadvantage: The disadvantage of working with franchise brokers is that their fees are high and typically average 50% of your initial franchise fee. Additionally, some broker organizations charge membership fees to join their organization.
Our Recommendation: Ultimately, we recommend working with reputable franchise brokers to achieve a portion of your franchise sales objectives. We believe that the cost of working with a reputable franchise broker far outweighs the fees that you will pay. However, you must be cautious about franchise broker organizations that charge high upfront entrance fees for joining their organization as a brand that their brokers will show to prospective franchisees.
- Organic Web SEO (Search Engine Optimization)
Building your website and web presence is an important long-term task. To start off, add a franchise opportunity page to your existing business website. The webpage should be focused on the value proposition of your brand and your brand story and should include a lead capture form where a prospect can enter their email address and contact information in exchange for more information. Over time, you may develop a separate franchise sales website. Either way, you will need to develop web content that, in time, will help generate organic search engine traffic.
Advantage: The advantage of generating franchise sales leads through organic web traffic is that it is cost-effective.
Disadvantage: While there is no disadvantage to sales leads generated through organic web traffic, it takes time. Your website will not produce leads right away and measurable results may take months or years.
Our Recommendation: Investing in and developing unique quality content for your franchise sales webpage or website is a win-win scenario. Although it will take time to generate web traffic from organic search results, the content that you develop will also serve as an important conversion tool for prospective franchisees who find out about your franchise through other marketing channels, i.e., if a franchise broker refers a prospect to your website, the web content will play an important role in the prospect’s decision-making process.
- Paid Web (Pay-Per-Click Ads)
Pay-per-click ads, or PPC, on Google and other search engines are relatively straightforward and there are many vendors that provide assistance in managing AdWords campaigns. As an emerging franchise brand, the most important questions that you will have to answer are if, when, and how to effectively use AdWords campaigns in your franchise sales marketing. As you will see in our recommendation below, unless you have an extremely targeted AdWords campaign (i.e., a campaign targeted to a specific subset of qualified prospects within a concentrated geographic area) we do not recommend AdWords campaigns within the first 12 to 18 months of your franchise offering.
Advantage: Pay-per-click ads can generate immediate traffic to your franchise sales website.
Disadvantage: Pay-per-click ads are extremely expensive, require a large budget, and, for emerging brands, are likely to produce a negative return on investment. The potential for a negative ROI is not only due to the competition and the high cost per click but because most emerging brands do not have the conversion systems (i.e., compelling brand story, value proposition, conversion process, dedicated landing pages, and follow-up drip campaigns) in place to maximize the value of each click.
Our Recommendation: For most emerging franchise brands, we do not recommend pay-per-click ads until your brand is seasoned and you have the right conversion systems (i.e., compelling brand story, value proposition, conversion process, dedicated landing pages, and follow-up drip campaigns) in place to maximize the high cost and value of your pay-per-click ad. If and when your franchise brand is ready for pay-per-click ads, start with limited and targeted campaigns that are focused on a subset of potential franchisee candidates within a targeted geographic area. Additional Recommendations:
- Use Landing Pages – For all web campaigns, whether Google Ads or paid social media ads, it’s important to develop and use dedicated web landing pages. Rather than linking paid ads to your home page or to the general franchise sales page of your website, your paid ads (i.e., pay-per-click ads and paid social media ads) should be linked to dedicated landing pages that contain content customized to the ad and that will allow you to track the effectiveness of your marketing campaign. Over time, you’ll want to A/B test different landing pages to see what messaging works best and what paid media brings you the best qualified franchisees. One of the biggest mistakes that emerging franchise brands make is that they jump right into spending money on expensive pay-per-click ads and other paid media without developing specific landing pages to monitor and track their campaign results. To learn more about landing pages, Unbounce does a great job of explaining what landing pages are and how to structure them.
- Focus On Collecting Prospect Information – One of the biggest mistakes that franchisors make when using paid ads is trying to make the ad and landing page do too much. The goal of your pay-per-click ads shouldn’t be to sell a franchise, but rather to introduce your franchise opportunity to qualified prospects and encourage those prospects to fill out a contact form to learn more about your franchise. Once you have the prospect’s contact information, you can start a more active drip campaign where you communicate with the prospect, offer additional information, invite them to webinars, send them information packages, and engage in a more targeted communication.
- Organic Social Media
Just like your organic web strategy, creating content and engaging prospective franchisees organically (i.e., without paid ads) through social media channels like Instagram, Facebook, LinkedIn, and Pinterest represents is cost-effective and critical to franchise sales.
Advantage: The advantage of franchise sales leads generated through organic social media is that they are relatively inexpensive. Social media will allow you to build on your existing base of followers and target franchise sales to those who already know your brand and business.
Disadvantage: While there is no disadvantage to sales leads generated through organic social media, building sales organically takes time and requires persistence.
Our Recommendation: Building out your social media presence is a necessary task that presents a win-win scenario. Although your organic audience will initially be limited, posting on your social media channels is cost-effective and will serve as an important validation tool for prospective franchisees who learn about your brand through other marketing channels.
- Paid Social Media Ads
As you build your social media presence and your organic audience, paid social media ads represent a great opportunity to reach targeted audiences.
Advantage: Paid social media ads are effective at audience-building and allow you to target your ads to specific audiences.
Disadvantage: Like pay-per-click ads, social media ads can get expensive and require careful management.
Our Recommendation: When managed correctly, paid social media ads represent a unique opportunity for emerging franchise brands. If you have spent the time and effort in building your website, your organic social media, and the positioning of your franchise brand and brand story, social media ads can be highly effective in helping you sell franchises. Your social media ads should be targeted to subsets of demographics of individuals who share interests, occupations, and skills consistent with perfect franchisees for your system.
- Franchise Public Relations
Public relations relate to building your franchise’s brand presence and telling your brand story in media channels that include national and local news, magazines, and specialized publications. PR may include a local media channel discussing the opening of a franchise outlet within a particular area, online articles about your franchise brand, and even national television appearances that connect your brand with other news events.
Advantage: Exposure from PR-driven media appearances will generate interest in your franchise brand and will help the credibility of your brand with franchisee prospects.
Disadvantage: Although PR appearances are, technically, free (i.e., you do not pay the media outlet for the appearance or article), it’s still pay-to-play as you will need to hire and pay a good public relations agency to get you media exposure.
Our Recommendation: Public relations should be a part of your franchise sales marketing. Good PR placements will not only generate interest in your franchise brand but also provide your brand with third-party validation that will assist in the franchisee conversion process. As an emerging franchise brand, when hiring a PR agency, it’s important to establish clear expectations as to the types of media placements that the agency can and cannot deliver for you, which will also depend on your company, the industry that you’re in, and how compelling your brand story may or may not be. Investing in PR is a long-term process when evaluating the costs and potential return on investment; it may take many months before it generates sold franchises, so it’s important that your PR placements also serve a role in validating your brand for your franchisee prospects.
- Franchise Influencers
Franchise influencers are credible authors, web content curators, and bloggers who have developed a specialized expertise and a following within the franchise community. These influencers offer valuable and credible information to prospective franchisees, and within certain parameters offer assistance in providing exposure to franchisors and franchise brands.
Advantage: Reputable franchise influencers can bring instant credibility to your brand.
Disadvantage: If you are working with a reputable franchise influencer, there are no disadvantages provided that the cost charged to you is fair.
Our Recommendation: We recommend building relationships with and working with franchise influencers. Depending on who you are working with, the relationship may relate to advice and assistance with positioning your brand, and possibly promoting your brand. For great insight into the work of one of the best franchise influencers, check out The Franchise King®.
- Online Franchise Portals
Online franchise portals are websites that list many franchise brands and position themselves as a resource for individuals looking for franchise opportunities. These online portals use organic SEO and pay-per-click ads to get visitors to their website. From there, prospects are encouraged to enter their information and are shown various franchise brands and opportunities. Online portals make money by charging franchisors like you a fee to be listed on their website and fees for you to buy prospective franchisee leads from the portal, i.e., you buy leads comprised of information that prospects enter on the portal site.
Advantage: Technically, the leads that you purchase are somewhat qualified in that the lead should be from a person who is actively seeking out a franchise.
Disadvantage: Many leads may turn out to be low-quality and result in a low or negative return on investment when compared to the money you spend on relatively qualified franchisee leads.
Our Recommendation: Currently we do not recommend online portals for emerging franchisors.
What to include on your franchise website or page:
a. Contact Form You always want to give users the opportunity to fill out their information and contact you right away. Your contact form needs to be easily found. Initially, you may only want to ask prospects for basic information (name, email, states they are interested in opening a franchise in). How do you get prospective franchisees to give you their information? Give them a downloadable copy of your Franchise Opportunity Guide.
b. Value Proposition Once you define what’s unique about your franchise opportunity, the perfect medium to display this on is your website. How will your franchise transform the lives of your perfect franchisees and help them achieve their financial goals? Remember, stay away from typical differentiators and stand out from the crowd. Start off with a solid base and build up your site over time.
c. Franchise Opportunity Guide Some people refer to this as a franchise brochure. Basically, it should be a digital guide about your franchise offering that prospects can download or print. You can hand these out at trade shows, such as the International Franchise Expo, and should have them readily available for good prospective franchise buyers.
d. Video According to WordStream, there are staggering statistics that prove video is key for websites. Having a personal video introducing yourself and your franchisees can be very helpful to convert your leads.
No, licensing is not an alternative to franchising. Sometimes, either based on bad legal advice or a lack of information, business owners enter into a license agreement believing that it is not a franchise, and therefore they do not have to go through the franchising process.
Here’s the catch: within every franchise is a license. The definition of what “creates a franchise” is so broad that license agreements end up triggering franchise liability and serious legal issues. If the business relationship that you are entering into includes (a) the license of a trademark, (b) the payment of a fee, and (c) an agreement where you will have a level of control over how someone operates their business, the business relationship is a franchise and you will need to comply with the franchise laws. Learn more about licensing versus franchising and the difference between them.
If you have already sold licenses, the good news is you can convert your license system to a franchise system.
If you are going to franchise the right way, you need to work with a lawyer who specializes in franchising and who is experienced in working with new and emerging franchisors like you.
The reason is simple: everything you will do as a franchisor – from franchising your business to selling franchises – is regulated by federal and state franchise laws and requires extensive coordination and integration into your FDD and the agreements between you and your franchisees. As a franchisor, your most important “asset” will be your franchise agreements and the legal obligations between you and your franchisees, including your franchisee’s ongoing obligations to pay you royalties. After years of growth, if and when you decide to sell your franchise system or take on private equity investors, you’ll be glad you didn’t cut corners with your legal obligations.
A good franchise lawyer will be able to help you through each phase of the franchise development process and will provide you with franchise development insights and strategies that have worked for other brands. He or she will also help you avoid the mistakes and pitfalls of franchising that many start-up franchisors don’t know about or, unfortunately, find out about too late. Be careful because many “franchise consultants” pretend to be lawyers or pretend to have lawyers on their staff. However, what these consultants are really doing is practicing law illegally and harming many unsuspecting start-up franchisors who don’t yet realize the legal importance of their FDD and future franchise agreements.
The good news is that there are some really good franchise law firms out there. The right lawyer for you should understand your brand, believe in your goal and vision as a brand and founder, and have the systems in place to guide and help you franchise the right way. To learn more about selecting the right lawyer in our Guide to Selecting a Franchise Lawyer.
No. Your FDD is a legal document that requires the integration of federal and state-specific franchise laws and regulations and should only be prepared by a qualified franchise lawyer.
If you have done a Google search about franchising your business, chances are you have come across search results that not only include franchise lawyers but also franchise consultants and franchise developers. You may not even notice a difference – and this may be intentional on the part of the consultants and developers, who attempt to appear as “one-stop shops” that also offer legal services. Franchise consultants and franchise developers are not franchise lawyers and they can’t provide you with legal advice; they can’t have their “in-house lawyers” provide you with legal advice; and they don’t possess the necessary training and expertise to prepare your FDD, register your franchise offering, and legally protect your brand.
While reputable franchise consultants offer valuable skills, their role should never be to prepare your FDD, register your franchise offering, register your trademarks, or guide the legal development of your franchise. Your franchise lawyer should work directly for you and be directly accountable to you.
By reading this guide, you’ve already taken the first step! Now that you have a solid foundation as to what franchising is all about and the steps involved, start building the right team to help support and guide you in franchising your business.
The Internicola Law Firm, P.C., is dedicated to helping emerging brands grow through franchising and we would be glad to speak with you. Learn more about our Franchise Launch Program and how we help you create a winning franchise system or call us at (718) 979-8688.
Below is a glossary of some key franchise terms and definitions:
Area Representative Agreement – Where a franchisor designates and appoints a third-party area representative as the franchisor’s special agent within a designated territory. Under an area representative agreement, the area representative will pay an upfront fee depending on the scope and size of the area representative’s designated territory and in exchange for meeting franchise sales goals and acting as the franchisor’s agent in training and supporting franchisees. The area representative will typically receive compensation based on a percentage of initial franchise fees and ongoing royalties paid by franchisees within the designated area representative territory.
Designated Territory – A designated territory, also sometimes referred to as an operating territory or protected territory, is a territory within which a franchisee is granted the right to establish and operate its franchised business. For brick-and-mortar franchised businesses, a designated territory is typically defined and measured as a radius or area surrounding the location of the franchised business. For service-based businesses, a designated territory is typically defined as a geographic area within which the franchisee is authorized to offer and sell the services and products of the franchised business. Typically, a franchisor will agree to not authorize or establish a competing franchise within the designated territory. The scope of protection afforded to franchisees in their designated territory varies from franchisor to franchisor.
Development Agreement – A form of a franchise agreement that involves the development of multiple franchise outlets and locations by a single franchisee. Under a development agreement, a franchisee is typically assigned a development territory and within the development territory the franchisee is required to establish and operate multiple franchise outlets and locations. The development agreement will include a development schedule that the franchisee must comply with. A development agreement is also referred to as a “Multi-Unit Development Agreement.”
FDD – The abbreviation for franchise disclosure document. See “Franchise Disclosure Document.”
Federal Franchise Rule – The rules and regulations issued by the Federal Trade Commission titled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” under 16 CFR Parts 436 and 437.
Federal Trade Commission – In franchising, at the federal level, the Federal Trade Commission is charged with overseeing and regulating franchise sales. As of July 2, 2007, the FTC issued the Federal Franchise Rule.
Financial Performance Representation – A financial performance representation, also referred to as an “earnings claim,” is any oral or written statement or representation made by a franchisor or the franchisor’s agent about the actual or potential financial performance of a franchised business. Under the franchise laws, franchisors are not authorized to make financial performance representations unless they are disclosed in Item 19 of the franchisor’s FDD. Learn more about financial performance representations.
Franchise – A franchise is a contractual relationship between two parties – typically referred to as the “franchisor” and “franchisee” – where the contract or relationship typically (a) involves the payment of an upfront fee, (b) involves the license of a trademark, and (c) involves the franchisor exerting a form of control over the operations of the franchisee, such as in a marketing plan or system that must be followed by the franchisee.
Franchise Agreement – The legal agreement that creates the franchise relationship between a franchisor and franchisee. Under a franchise agreement, a franchisee is granted the license, right, and obligation to establish and operate a franchise business / outlet at a particular location or within a designated territory. Development agreements, area representative agreements, and master franchise agreements are different forms of franchise agreements.
Franchise Disclosure Document – A franchise disclosure document, also referred to as an “FDD,” is a legal document that contains detailed disclosures about a franchise offering. Before offering and selling a franchise, a franchisor must disclose its franchise disclosure document to its prospective franchisees no less than 14 days prior to signing a franchise agreement or receiving any fees from the franchisee. The contents of a franchise disclosure document are broken down into 23 disclosure items or sections that are mandated by the Federal Trade Commission. Certain states have enhanced the requirements as to what information and disclosures must be contained in a franchise disclosure document.
Franchise Fee – The initial upfront one-time fee that a franchisor charges a franchisee at the time of signing a franchise agreement. The franchise fee represents the initial license fee that a franchisee pays to become a part of a franchise system. Franchise fees are typically used by franchisors to compensate themselves for issuing the franchise license and to absorb costs incurred by the franchisor in the franchise sales process and costs that the franchisor will incur in providing the franchisee with initial training and support.
Franchise Filing States – The franchise filing states are states that require a franchisor to file a notice with the state before offering or selling a franchise in that state. Some franchise filing states require annual filings and some require one-time filings. For franchisor’s whose trademarks are registered with the USPTO, the franchise filing states include: Connecticut, Florida, Kentucky, Maine, Nebraska, North Carolina, South Carolina, South Dakota, Texas, and Utah.
Franchise Laws – A combination of federal and state laws that govern and relate to the offer and sale of franchises and the relationship between franchisor and franchisee. The franchise laws include the Federal Franchise Rule and an assortment of state-specific laws.
Franchise Lawyer – A franchise lawyer is a licensed lawyer who possesses expertise and experience in franchising. Franchise lawyers should be experienced in drafting franchise disclosure documents, preparing franchise agreements, registering FDD’s, resolving conflicts with franchisees, and advising businesses on the franchising process and how to comply with state specific franchise, business opportunity and franchise relationship laws. The American Bar Association Forum on Franchising is one of the largest lawyer membership organizations focused on franchise law.
Franchise Registration States – The franchise registration states are states that require a franchisor to register its franchise disclosure document with a designated state regulator before the franchisor may offer or sell franchises in that state. Franchise registration states require franchisors to renew their franchise disclosure document registrations no less frequently than annually. Regulators in the franchise registration states will review and comment on the franchisors’ FDDs, and in certain instances, impose obligations and restrictions on the franchisor as a condition for registration. For franchisors whose trademarks are registered with the USPTO, the franchise registration states are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington, and Wisconsin. If a franchisor’s primary trademark is not registered with the USPTO, then the following states, effectively, become franchise registration states and require FDD registration: Connecticut, North Carolina, South Carolina, and Maine.
Franchisee – The individual or entity who purchases and is granted the right to operate a franchise. A franchisee will sign a franchise agreement giving him or her the right to establish a franchised business. Commonly, a franchisee will pay an upfront franchise fee to obtain the initial license and right to become a franchisee, and the franchisee will pay ongoing royalty fees to the franchisor.
Franchised Business – The business that a franchisee establishes and operates under the terms of the franchise agreement.
Franchisor – An individual or entity that offers or sells a franchise. Through a franchise agreement, the franchisor grants to its franchisees the right to establish and operate a franchised business that is owned by the franchisee.
FTC – An abbreviation for the Federal Trade Commission. See “Federal Trade Commission.”
International Franchise Association – The International Franchise Association, also referred to as the “IFA”, is the largest franchise trade association in the United States. IFA members include franchisors, franchise suppliers, franchisees, and franchise professionals. The IFA is a franchising advocate for its members and is active in franchise education, networking, and legislative lobbying.
Master Franchise Agreement – An agreement in which a franchisor transfers its rights in a designated territory as a franchisor to a third-party master franchisee. Within the designated territory, the master franchisee acquires all the rights of the franchisor and possesses the legal authority to directly sell franchises and sign franchise agreements.
Operating Territory – see “Designated Territory.”
Operations Manual – The confidential manual provided by a franchisor to its franchisees. The operations manual serves as a guide for franchisees and includes detailed information about the franchised business, including pre-opening requirements, operational requirements, approved vendors and suppliers, and the franchisor’s systems and procedures for providing the services or products of the franchised business. The table of contents to a franchisor’s operations manual must be disclosed in the FDD.
Protected Territory – see “Designated Territory.”
Royalty Fees – Royalty fees are ongoing recurring fees that a franchisor charges a franchisee on a periodic basis, such as weekly or monthly. Royalty fees are typically charged as a fixed percentage of the franchisee’s gross sales or as fixed dollar amounts. Royalty fees compensate the franchisor for the franchisee’s continued license and right to operate the franchised business, and cover costs and expenses incurred by the franchisor in providing franchisee with support.
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