Three Legal Tips to Consider Before Franchising Your Business

White Deer Group asked Jonathan Barber, Managing Partner of Charlotte-based Franchise.Law, to give us three legal franchising tips that he thinks every concept should do prior to franchising their business. This is a companion piece to Five Marketing Decisions You Should Make Before You Franchise and Three Financial Considerations for Emerging Franchise Systems.

In my law practice, I get to work with some of the most amazing entrepreneurs in the franchise world. Not only have they created a business concept that “works,” but they have franchised that concept and shared it with others. In sharing their success, they get to see others reap the rewards of their hard work.

From my years of working with franchisors, I have (at least) three legal franchising tips that every aspiring franchisor needs to consider before taking the leap into franchising.

1. Systems and Procedures: The Operations Manual

I promise I didn’t come up with this tip or put it at the top of the list because this is a guest post on the White Deer Group’s blog! If you don’t have your systems and procedures in place, how can you expect someone else to run your business profitably? It’s very likely that you have systems and procedures that help your business run smoothly, but it’s also very likely that those systems are in your head. This is especially true if you are the “secret sauce” behind your business. If you are the key person involved in the day-to-day operation, and your processes aren’t documented, you can’t expect someone else to take the reins as a franchisee unless you come with their franchise purchase!

The franchise laws require that you include your operations manual table of contents in your franchise disclosure document. This is the Federal Trade Commission’s way of nudging you to have a thorough operations manual. On the flip side, if you have a thin operations manual, you’re definitely more likely to be sued by a franchisee one day!

If you don’t have your systems and procedures in place, how can you expect someone else to run your business profitably?

2. Trademarks

On average, an unopposed trademark application with the United States Patent and Trademark Office will take 7-10 months from the date of filing to become registered. If you are considering franchising your business in the near future and you don’t have a federally registered trademark, you need to jump on that and get your business’s name and logo registered.

I often work with entrepreneurs who are franchising their business while their trademark application is pending. There’s a risk in that because the trademark application could be opposed or denied for various reasons. If the franchisor sells one or more franchises and the trademark application doesn’t pan out, they could face claims from those franchisees. After all, those franchisees didn’t get any protected intellectual property along with their franchise purchases. They could be forced to rebrand their entire businesses at any time due to this oversight.

An additional consideration is that the franchise loses a significant amount of value if its trademarks are pending or otherwise not registered. This is another ripe area for litigation that can easily be avoided by being proactive!

I’ve seen new franchisors get frustrated when they add royalty fees and marketing fund fees to their model and suddenly realize that the business isn’t all that profitable.

3. Financial Performance Representations and Franchise Viability

Franchisors can include historical or projected financial performance representations in Item 19 of their franchise disclosure document.

First off, nobody includes projections because that’s an almost guaranteed way to get sued. Second, many brand-new franchisors lack the financial data to put together their initial Item 19 representations. If they do have this data, and they include a profit and loss statement for their prospective franchisees to review, they have to “impute” royalty fees, marketing fund fees, and any other required fees that franchisees will have to pay.

I’ve seen new franchisors get frustrated when they add royalty fees and marketing fund fees to their model and suddenly realize that the business isn’t all that profitable when those fees come out. This is something that they should have considered before deciding to franchise their business. Does the business model make sense financially if these additional fees are added? Is it as attractive as competitors?

These are three major legal franchising tips for anyone considering franchising their business. Each of them is meant to get entrepreneurs thinking about these topics, and they’re just the tip of the iceberg in what a new franchisor must work through when franchising their business!