New to franchising? Do you want to learn more about franchising your business, where to start, if you’re ready for franchising, and how to know if you are doing it right?
In this guide you’ll learn the basics of franchising, how to franchise your business, and how to win at franchising.
We’ll also take a deeper dive into legal requirements for franchising and why they matter, steps to take before and after you launch your franchise, and even some tips on how to sell franchises.
Franchising is a legal and business model that allows business owners like you to achieve multi-unit growth and expansion.
When you franchise your business you’ll be creating the legal documents, disclosures, and operational requirements necessary to comply with the franchise laws and allow you to sell franchises to individuals who will become your franchisees and help you grow your business by opening up their own franchised locations.
As a franchisor, you’ll be granting franchisees the legal right to establish their own franchised locations using your trademarks, business systems, methods of operation, suppliers, training, and the on-going support that you will provide to them. In-turn, franchisees will pay to you an initial franchise fee and recurring royalty fees.
Under the franchise laws, before you sell a franchise to a prospective franchisee your must first deliver and disclose to him or her a mandatory prospectus document called the franchise disclosure document or FDD. Federal and state franchise laws regulate the information that must be disclosed in the 23 disclosure sections (each section is called an “Item”) of your FDD. Your FDD must be updated at least annually and must be registered or filed with certain states. When you sell a franchise, the legal agreement between you and your franchisee is known as the franchise agreement.
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 avoid pitfalls and win at franchising. If you are confused about this stuff, 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.
A franchise disclosure document, also called an FDD, is the legal document you 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 prior to signing any agreement with a franchisee or accepting any payments from a franchisee.
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.
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 some states that require franchise filings or business opportunity filings before you can sell any franchises. Learn more about when an FDD expires and must be updated.
When you franchise your business it means that you have taken the necessary legal and business steps to sell franchises. 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:
Don’t forget that franchising is much more a process than a destination. Once you “franchise your business” you are just getting started.
The answer depends on where you will be offering and selling franchises. At the federal level, the franchise disclosure document is not registered or filed with any government agency. Although your franchise disclosure document must comply with federal law and the Federal Franchise Rule, compliance is self-regulating, i.e., it is up to you and your franchise lawyer to ensure that your franchise disclosure document is compliant and properly issued. At the state level, in the franchise registration states, your franchise disclosure document must be accepted by and registered with a designated state regulator before you may 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 franchise disclosure document is current and in compliance with federal law.
See in the glossary below 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 the legal portion of 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 own internal team.
This ultimately depends on who you work.
When evaluating the cost to franchise your business it’s important understand that, generally, there are two stages to the franchise development process:
The first 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 will include developing and issuing your FDD, preparing your operations manual, and competitively benchmarking your franchise offering relative to your competitors.
The second stage is the franchise sales stage which is typically the twelve month period following the issuance of your FDD. During this initial sales stage you’ll be taking steps to sell franchises through a number of steps 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 first stage – the franchise development stage involving: (a) competitively positioning your franchise offering 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.
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, the’ll under charge you without you realizing that you are not franchising the right way. Be careful of “franchise developers” who claim to do everything in-house, including the legal preparation of your FDD. Its 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.
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.
While you’re developing your franchise, it’s smart to implement these strategies that fit your brand growth goals. Between business and legal decisions and evaluating key metrics, the following list should help with your overall planning before you franchise.
When we use the phrase “launch your franchise,” we are referring to completely developing your FDD and having it ready for franchise sales.
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:
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.
Before you spend money on franchise sales marketing, you must avoid this mistake: the mistake that we’re going 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 don’t. 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.
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.
Once you have established the value proposition of your brand and created your brand story, start evaluating some of 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.
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, state 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, for example, 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 franchise disclosure document 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 on-going 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 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 franchise disclosure document 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 franchise disclosure document, register your franchise offering, and legally protect your brand.
While reputable franchise consultants offer valuable skills, their role should never be to prepare your franchise disclosure document, 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 (800) 976-4904.
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 not 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 franchisors 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.
Learn more about our fixed-fee Franchise Launch Program and how we help you win at franchising.
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