Three Things You Must Do Before Starting a Franchise

Are you a business owner in the United States thinking about franchising your business? Before you start that process, take a step back to research, strategize, and prepare. Franchising is a good way to expand your company’s physical presence, gain brand recognition, and increase revenue.

However, it can also be a death sentence for your thriving business if you do not go about it correctly or miss a step along the way. More so, being a large undertaking, franchising a business requires that you be fully prepared to reap its benefits.

Working with an experienced firm, such as Franchise.Law, can make this journey smoother. These professionals can help you navigate legal complexities, ensuring your franchise model is built on a solid foundation and fully compliant with regulations. Before diving in, it’s crucial to take essential steps to set up your franchise for long-term success.

Before starting a franchise, make sure you do these three things first:

1. Have a System That Is Developed and Consistent

The explanations to prospective franchisees on how your business works and how to start a new location are entirely on you. Therefore, with your legal team, you need a comprehensive Franchise Disclosure Document drawn up.

The FDD will outline details like the startup costs, suppliers, operations, training, necessary equipment and technology, and royalties. However, before you create an FDD, you must develop a consistent process for starting and operating new locations.

2. Have Several Other Locations

When franchising, the golden rule is to first have one or more corporate-owned locations before franchising a business. Having several locations in one or more markets helps you show that your business model works consistently, and a couple of successful locations is a big deal.

When you have several other business locations, franchising your business can be smoother than if you do not. When you are ready to franchise, one of your top employees or managers might be your best first franchisee. Hence, your franchise operation starts with someone already invested in the company and believes in your company’s goal and mission.

3. Maintain Legal Support

Franchising is a legal business, which is why having strong legal support goes without saying. More so, franchisors are regulated at the federal and state levels, having several legal pitfalls that working with a lawyer helps one avoid.

For example, the Federal Trade Commission created the Franchise Rule, which guides what your FDD should entail. Additionally, regulations exist detailing when you must share a copy of the FDD with a prospective franchisee before they sign the agreement.

Apart from the Franchise Rule and the FTC’s accompanying regulations, some states require franchisors to file their FDD before certain franchise-selling activities. These states include California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington and Wisconsin. Furthermore, states like Connecticut, North and South Carolina, and Maine require franchisors without a federally registered trademark to register their FDD.

Understanding Financial Obligations and Funding Requirements

Starting a franchise requires substantial financial planning. Beyond initial costs like legal fees, marketing, and the creation of the Franchise Disclosure Document (FDD), you’ll need to budget for ongoing expenses such as training, support, and operational resources. Securing adequate funding is critical to cover these expenses and support franchises as they launch new locations. Some business owners seek out investors and loans or consider reinvesting profits to support franchise growth. Developing a clear financial plan and consulting with financial advisors ensures you’re well-prepared to sustain and expand your franchise successfully.

Conclusion

“Having a business opportunity is worlds different from creating a franchise; it can be much broader than traditional franchising,” says Attorney Jason W. Power of Franchise Law. Therefore, whether or not you plan to start a franchise or be termed a “franchisor,” you should consult your lawyer. They can help you ensure you are not offering a business opportunity and are not an inadvertent franchisor.