in 2019

THE INTERNICOLA LAW FIRM, P.C. | franchiselawsolutions.com | 800.976.4904

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 the legal requirements for franchising and why they matter, steps to take before and after you launch your fran-chise, and even some tips on how to sell franchises.

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Entrepreneurs Kick Ass® is a registered trademark of The Internicola Law Firm, P.C. Representing Entrepreneurs That Kick AssTM is a trademark of The Internicola Law Firm, P.C.

The Ultimate Guide to Franchising Your Business in 2019

Introduction: What is Franchising?Franchising is a legal and business model to grow your business and allows business owners like you to grow your business and expand your brand.

When you franchise your business you will be creating the legal infra-structure and business systems that will allow you to recruit and onboard qualified franchisees who will duplicate your brand and business model.

Before you sell a franchise, you will disclose your prospective franchisees with a prospectus document called the Franchise Disclosure Document or FDD. When you sell a franchise, the legal agreement between you and your franchisee is known as the Franchise Agreement. Franchisees pay a one-time franchise fee when signing the Franchise Agreement. As a fran-chisor, you will be providing your franchisees with ongoing support and training. Franchisees also pay recurring royalty fees.

If you’re interested in franchising your business, you’re in the right place. This guide will provide you with a detailed understanding of fran-chising and help you to start winning at franchising. If you are confused about this stuff, you’re not alone and we’re here to help.

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All About the FDD: What are the Franchise Laws and What is a Franchise Disclosure Document?

Franchising is a regulated industry and requires compli-ance with federal and state franchise laws.

A Franchise Disclosure Document, also called a FDD, is the legal docu-ment that you need to sell franchises. It’s required by federal and state law and, basically, is the entire 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.

What is in the FDD?

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 be-tween 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 be-fore you can offer a franchise.

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Do I Have to Update My FDD Annually?

Yes. Your FDD has to be updated at least annually. In franchise registra-tion states the FDD must be approved and registered with state regula-tors before offering or selling a franchise in that state. There are some states that require franchise filings or business opportunity filings before selling any franchises.

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What are the Steps to Take to Franchise a Business?

When you franchise your business, it means that you have taken neces-sary legal and business steps to allow you 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 have to register or file your FDD with specific states to be able to sell franchises.

The following are major steps you’ll be taking when you develop your franchise offering:

1. Franchise Disclosure Document

Your FDD should be prepared in a way that works for all states in the United States. We call this “multi-state”. This allows you to sell individual units as well as multi-unit area development sales when you need it.

2. Operations Manual

You will be providing a confidential Operations Manual to your franchisees that will explain everything your franchisees will need to run their business. This how-to guide includes opening and closing checklists,

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recipes, training information, and much more. Your Operations Manual will always need to be updated.

4. Register Your Trademarks

It’s important to register your trademarks (both the word and design of your logo) with the United States Patent and Trademark Office (USPTO).

5. Establish Your New Franchising Company

New franchisors will have to establish a brand new franchise entity, i.e., ABC Franchising, LLC. You’ll also need to open a bank account for this new company so your accountant will be able to prepare an initial Open-ing Balance Sheet that’s required for the FDD.

6. Register Your FDD in Franchise Registration States

Before you can sell in Franchise Registration States (NY, IL, MD, CA, etc.) or certain Filing States (FL, TX, NC, SC, etc.) you must fill out the appropriate applications

and notices. Check out our Interactive State Registration Map on our website.

7. Create Your Sales Strategy

Keep in mind that even after the legal documents are complete, deter-mining your initial franchise sales strategy is critical. Figure out where you want to open franchises. Where is there interest in your brand? Do

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Click here to view the Interactive Franchise Registration Map

you want to start expanding locally? Your strategy will come into play with both franchise sales and franchise registration.

8. Set a Realistic Plan and Budget

In addition to the significant legal compliance tasks involved, a big com-ponent to the process involves implementing business planning and franchise development strategies. Your strategies should be focused on franchisee support, franchise sales, and the long-term protection of the franchise system that you are creating. Keep in mind that franchising is long-term. Your future success requires making the right connections, relying on honest advisors, and setting a realistic plan and budget for the next one, two, three, four, and five years.

Don’t forget that franchising is much more a process than a destina-tion. Once you “franchise your business” what is really happening is that you are just getting started.

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Does My Franchise Disclosure Document Have to be Registered or Filed?

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 law-yer 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 the Glossary at the end of this e-book for list of the “Franchise Reg-istration States” and the “Franchise Filing States” or visit our interactive franchise map online to learn more about each state and its franchise requirements. Also, learn more about where the FDD gets registered and filed.

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How Long Should it Take to Franchise My Business?Typically the legal portion of fran-chising your business takes be-tween 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.

How Much Should it Cost to Franchise My Business?This ultimately depends on who you decide to work with. We’ve seen the cost range anywhere from less than $20,000 and over $100,000.

What determines this huge variation in price?

Be very careful when selecting a lawyer or franchise developer. Many ven-dors rely on the fact that there are things that you, as a new franchisor, just don’t know about the process and will overcharge 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 variations in cost include developing your Operations Manual. Many of our clients prepare their own Operations Manual themselves. Most developers typically charge $15,000 - $20,000.

The Internicola Law Firm charges between $24,000 - $34,000 for legal representation PLUS franchise development, planning, and support.

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Tip: Do your

research

and look for

transparency

before engag-

ing a team to

develop your

franchise. Ask

for a detailed

proposal and

client refer-

ences.

5 Essential Strategies to Consider Before Launching your Franchise While you’re developing your franchise, it’s smart to im-plement 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 launch your franchise.

P.S. When we use the phrase “launch your franchise”, we are referring to completely developing your FDD and have it ready for franchise sales.

1. Set Realistic Goals.

Franchising is more of a marathon than a sprint. Set realistic goals as to what franchise success will look like for you. What are realistic sales goals in your first year and over the next two, three, four, and five years? Before launching your franchise is the best time to start plan-ning your five-year strategy.

2. Research Your Competitors.

You need to competitively position your franchise of-fering among your competitors. Within your Franchise Disclosure Document and franchise offering, you will be

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disclosing important cost metrics that include things like the initial franchise fee, the ongoing royalty rate, franchisee fee obligations, territory sizes, and a broad range of other legal and business fac-tors that will influence the profitability of your franchisee’s oper-ations and their overall rights. Evaluate your competition, under-stand their metrics, and work with your lawyer to ensure that your Franchise Disclosure Document is competitively positioned.

3. Develop Your Franchise Offering for Both Individual and Multi-Unit Sales.

Having the ability to sell multiple franchise units to a single franchi-see is important. What does this mean? Many times, franchisees want to acquire the right to develop and open multiple locations or operate in multiple territories. That is, they don’t want just one location or one territory.

To be able to offer and sell both individual unit franchise and multi-unit franchises, your Franchise Disclosure Document must be structured to accommodate the sale of an individual unit franchise to a single franchisee. This is where the franchisee wants just one location and signs a single franchise agreement.

If a franchisee wants to buy the right to open multiple locations, they are given a Development Agreement. They’ll also get a sched-ule that gives them a certain amount of time to develop their addi-tional locations.

We call this a “dual structure”. Developing this dual structure will mean more upfront planning and work, but for the vast majority of industries, launching your franchise without the option will cost you sales and put you at a competitive disadvantage in the long run.

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4. Make Sure Your FDD is Compliant for Every State.

One of the most frustrating things for franchisors is being delayed and not being able to sell in their anticipated time-frame.

From the start, your Franchise Disclosure Document needs to be multi-state compliant. This means it should be ready for registration and filing in every state.

How to do this: As mentioned earlier, your lawyer needs to pre-pare your Franchise Disclosure Document on a “multi-state” basis. That is, your Franchise Disclosure Document should include - on a state-by-state basis required addendums and modifications to make your FDD compliant with various state laws. This is especially important in the franchise registration states. Without this level of multi-state compliance, you risk compliance violations and delays and potential roadblocks to future franchise sales.

5. Learn Franchising and Get Involved in the Franchise Community.

Use this time to start learning more about the franchising process. Get involved in franchise events.

While your franchise lawyer is developing your FDD, during your de-velopment calls and meetings he or she should also be helping you learn franchising and get you involved with franchise organizations, networking events, masterminds, and help you get to know other professionals and suppliers that will be of value after your franchise launches.

Tip: Speak to other franchisors and always be thinking about next steps.

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Is Licensing an Alternative to Franchising?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 he or she does not have to go through the franchising process.

The problem is this almost never works. 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. Learn more about licensing versus franchising.

If you have already sold licenses, the good news is you can convert your license system to a franchise system.

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Download Licensing vs Franchising

Do I Have to Work With a Franchise Lawyer?Technically, you never have to work with a lawyer. But, if you are going to franchise the right way, you absolutely need to work with a lawyer who specializes in franchising and who is experienced in working with new franchisors like you.

The reason is simple: Although the goal of franchising is business growth and selling franchises, everything you will do as a franchisor - from fran-chising your business to selling franchises - is regulated by federal and state franchise laws, and requires extensive coordination and integration into the Franchise Disclosure Document and the franchise offering.

A good franchise lawyer will be able to help you through each phase of the franchise development process and should be able to 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, unfor-tunately, find out about too late.

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.

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Can a Franchise Developer or Consultant Prepare my Franchise Disclosure Document Instead of a Franchise Lawyer?No. Your franchise disclosure document is a legal document that requires the integration of federal and state-specific franchise laws and regula-tions and should only be prepared by a qualified franchise lawyer.

If you have done a Google search about franchising your business, chanc-es are you have come across search results that not only include fran-chise 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 the 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 there are important and valuable skills for reputable franchise con-sultants, 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.

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How Do I Get Started?By reading this guide, you’ve al-ready 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 busi-ness.

We have a dedicated team in help-ing emerging brands grow through franchising and we would be glad to speak with you. Learn more about our Franchise Launch Pro-gram and how we help emerging brands create winning franchise systems or call us at (800) 976-4904.

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The Internicola Law Firm helps emerging brands get the legal support they need, resources for growth, and strategies to win at franchising.

At The Internicola Law Firm, we believe all emerging brands can win big at franchising.

We understand that franchising is about growing your business, elevating your brand, and building a winning organization. To do that, you need the right legal support, resources for growth, and strategies to win with franchis-ing.

For over 20 years, The Internicola Law Firm has been helping numerous emerging brands just like yours build, expand and protect their franchise sys-tems with proven strategies, guidance and know how that has earned us rec-ognition for flipping the script on what a law firm can do for you. Established by nationally recognized SuperLawyers and AVVO rated attorney Charles N. Internicola, we are a firm built specifically for emerging brands and we repre-sent entrepreneurs, founders, management teams and private equity through all stages of the business and franchise development life-cycle.

The Internicola Law Firm is a law firm with the heart of an Entrepreneur. Our team is obsessed with seeing emerging brands win in the marketplace and win with franchising. We combine our legal expertise with winning franchise industry know-how to give you an advantage in the market.

If are an emerging brand ready for a new winning franchise compliance and development strategy, we want to work with you. Contact us Today at (800) 976-4904.

AboutThe Internicola Law Firm