How do I know if my business is franchisable?
When you are first determining if you are going to franchise your business, there are a few things you want to think about.
First, you need to determine if your business is actually replicable. Franchises are carbon copies of each other and that is what really builds the value in the mind of the consumer.
They know they are going to get a consistent product every time they go to XYZ franchise. You will need to determine if your business is something that can be consistently replicated over and over.
The next thing you want to think about is if you want to be in the business of franchising. Once you are in the business of franchising, you are no longer in your original business. Your business now becomes selling and managing franchises, which is significantly different than running your original business.
Finally, give some real thought to the strength of your intellectual property. One of the most important things in a franchise system is brand consistency.
You need to have a strong trademark and other intellectual property that you can protect and your other franchisees can use.
Once I decide to franchise my business, how do I comply with the franchise law?
Franchising is highly regulated, so once you decide to franchise your business, compliance is the most important thing, other than getting the contracts right.
There are a number of contracts that govern the franchise relationship.
A franchise agreement is the one most people think of. There is also usually an area development agreement as well as some other contracts that go along with the franchise agreement.
All of these contracts, together with mandatory disclosures, need to be put together in a franchise disclosure document, which is required by law, highly detailed, and something that must be prepared and given to your potential franchisees at least 14 days prior to signing any binding agreement with the potential franchisee.
There are certain states in the U.S. that require you to submit your franchise disclosure document and other registration materials to the state regulator before you can actually try to sell a franchise in that state.
For example, in Virginia, Maryland, New York, Illinois and California, it is a violation of law if you try to sell a franchise without registering in that state first.
Florida is not one of those registration states.
Can I just license my business instead of franchising it?
Some people try to skirt the franchise law by doing a license, a trademark license or something similar. If structured properly, you can probably do that but you have to be very careful.
There are usually three elements involved in a franchise. If all three elements are present, it makes up a franchise, no matter what you call it.
If you have a trademark license, a fee that is paid to you and you have substantial assistance or control, such as training or a marketing plan, then it is a franchise.
If you have a franchise, even inadvertently, and you fail to comply with the law, then there will be consequences.
Some states, New York for example, are very strict.
You only need to have two of the three elements mentioned earlier in order to have a franchise.
What happens if I violate the franchise law?
If you violate the franchise law, the consequences are severe.
On the civil side, your franchisee, who bought the franchise from you, can probably sue you, get out of the contract and collect damages from you.
On the regulatory side, it is a crime so you could be criminally charged and heavily fined by the state or the federal government.
H. Timothy Gillis is a managing partner at Gillis Way & Campbell.