By Cliff Ennico
“My family and I run a very successful pub business in a Midwestern college town. We have a huge following, and a unique and distinctive railroad-themed image.
A number of people have approached us wanting to license our business concept. I’ve done some reading and it seems to do this we will have to be regulated as a franchise. Is that correct? And if so, how do we go about doing that?”
If you have a successful retail or service business with a strong local following, at some point you think about franchising. But you’re going to have to jump through a lot of hoops. Here are the questions you need to ask, and the steps you will need to take.
Will this concept work in a wide variety of locations? There are dozens of reasons why a small business may work in a particular location. To be a franchise, however, the business must work in lots of different locations – urban, suburban, rural, warmer, colder, high-income, low-income, and all places in between. Maybe even overseas.
Your railroad theme may work in the Midwest, but will it fly in Manhattan? Or Manhattan Beach (California)? Frankly, any sort of pub will have a following in a small college town with a captive market of thousands of thirsty undergraduates. Will it get the same traffic in a suburban shopping mall or commercial strip? Or in a huge metropolitan area in the Northeast with higher costs and tons of competition?
Generally, you shouldn’t even consider franchising your restaurant until you have at least several successful locations.
Can the formula be replicated? For a franchise concept to be successful, it has to be reduced to a “cookbook”. While you will never guarantee that your franchisees will be successful, they will expect that if they follow your recipes and business methods “to the letter,” they will get the same results as other franchisees. If you frustrate that expectation, they may sue you for fraud.
Franchises all strive to offer a uniform, consistent customer experience as part of their branding – a Burger King restaurant in Bangor, Maine looks and feels exactly the same as one in San Diego, California. Will you be able to find enough railroad memorabilia to stock 50 or more restaurants?
Can the brand name be trademarked? Successful franchising is all about having a unique, distinctive and appealing brand image. For any type of restaurant or “fast food” business, it’s all about your trademark. Not every name or logo can be trademarked. Even if it can, there might be another railroad-themed pub in a distant state with a similar name.
Do you want to get into the franchise business? When you franchise your business, you are no longer selling beer, hamburgers and other “pub grub.” You are selling franchises, which is a much different business. You no longer interface directly with your customers. Your franchisees do. As Ray Kroc, the founder of McDonald’s, once said: “We are not in the hamburger business; we are in the real estate business.” Are you okay with spending all your time on training franchisees and helping them find suitable locations for your restaurants?
If you can honestly answer “yes” to all of the above questions, you might want to consider franchising your business. There are five essential steps, as follows:
Trademark Your Name. Expect to spend at least $3,000 to $5,000 to register your brand name with the U.S. Patent and Trademark Office, including a thorough trademark search to make sure you name won’t conflict with or “infringe” anybody else’s registered trademark. Make sure your brand name is available as a website URL, especially a “top tier” domain name ending in “.com”.
Set Up Your Franchise Companies. Most franchises have two separate legal entities – one to hold the rights to their trademark and other intellectual property, and another “operating” company which offers franchises to the public and deals with the franchisees. Expect to spend at least $2,000 to $3,000 in legal fees to set these up.
Prepare your Franchise Disclosure Document (FDD) and Operations Manual. This is the most important, and most expensive step. You will have to prepare a disclosure document called a “Franchise Disclosure Document” or “FDD” – similar to the prospectus a company uses when it makes an initial public offering of its stock – in the form required by the U.S. Federal Trade Commission and containing all the information required by that agency’s “Franchise Rule” (www.ftc.gov/tips-advice/business-center/guidance/franchise-rule-compliance-guide). You will also have to prepare an Operations Manual for your franchisees – the “cookbook” – which may well run to several hundred pages of detailed information. Expect to spend at least $5,000 to $10,000 in legal and accounting fees to get these done the right way.
Register with the Federal Trade Commission (FTC). You will then have to register your FDD with the FTC in Washington, D.C. and wait several weeks for their staff to approve it. They may have questions, and you may have to make changes to your FDD before you get final FTC approval. Expect to spend at least $5,000 in filing fees and legal fees for this step.
Register in the “Registration States.” Fifteen states will require you to register and have your FDD reviewed again by a state government agency (usually the Attorney General’s office) – for a complete list, see www.frandocs.com/franchise-registration-states.htm. Don’t assume this will be a “formality” – many of the states have tougher rules than the FTC does, and you may have to amend your FDD to comply with state requirements. Expect to spend at least $5,000 in filing fees registering with the largest “registration states” (New York, California, Illinois, Indiana, Michigan, Virginia, and Washington) plus another $5,000 or more in legal fees.
Get In with the Franchise Brokers. While some prospective franchisees will find you on the Internet and reach out to you directly, the better ones come through a franchise broker. There are three major networks of franchise brokers – FranNet (www.frannet.com), The Entrepreneur’s Source (www.theentrepreneurssource.com), and FranChoice (www.franchoice.com) – and a host of independent brokers (search online for “[state] franchise brokers”). Make sure they know who you are, and make sure you understand how much they will charge for helping you find new franchisees (the typical brokers’ commission can be as much as 50% of the upfront franchise fee you will charge).
One last step: consider joining the International Franchise Association (www.franchise.org). It’s expensive – several thousand dollars a year at least in membership fees – but IFA membership lets potential franchisees know you are a “class act” following the franchise industry’s best practices and can be trusted with their life savings.
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of Small Business Survival Guide, The eBay Seller’s Tax and Legal Answer Book and 15 other books.