Should I Franchise My Business?
Whether you should franchise your business depends on a few factors. Franchising your business is a great way to grow your business. Rather than investing multiple times in multiple locations or territories for your business, you can license your business model to franchisees and collect royalties.
For example, if you own a restaurant, it could cost tens of thousands to open another location, and you will have to manage the overhead of the restaurant. Instead, you can invest once to create your franchise system and re-sell that system while still growing your brand, and you do not have to worry about the minute deals of each location.
What is a Franchise?
The Federal Trade Commission (FTC) defines a franchise as (i) the grant of a trademark, (ii) the franchisor exerts or has the authority to exert significant control or assistance over the operation of the business, and (iii) the franchisee pays the franchisor or its affiliate a fee (as little as $735 as of 2024).
How do you know if you are ready to franchise?
When deciding if your business is even ripe for franchising, consider the following:
- Your business has been open for at least a year
- You’ve established a trademark
- You can remove yourself from the business
Your business has been open for at least a year
Your franchise is a product that you are selling to potential franchisees, and franchisees want to know they are making a sound investment decision. In order to demonstrate that your franchise can be profitable, you will need at least a year’s worth of financial statements to prove this. Otherwise, you will likely not be taken seriously.
You’ve established a trademark
A trademark is at the core of a franchise. Because you are leasing your brand (via your trademark) to your franchisees, you want to ensure that your brand is protected at a federal level.
You can remove yourself from the business
One of the core aspects of a franchise system is that the daily operations are formalized in written operations manuals. You will need to get your business outside of your head and on paper in order to sell your franchise system. Operations manuals are also a required disclosure in your franchise disclosure documents.
Do I need to be a “big business” to franchise?
You do not need to be a big business to franchise. As stated above, a franchise fee can be as little as $735 and you only need to be in business for less than a year. Even the year requirement is not a legal requirement but a strategic and practical point. There is no minimum revenue or size you need to be before franchising your business. You will, however, need to ensure that you comply with federal and state (such as Illinois and Florida) laws by providing the required disclosures to franchisees.
How do I market and sell my franchise?
You can market and sell your franchise in two ways: 1) marketing directly to potential franchisees or 2) using a franchise broker to help you sell your franchise. Franchise brokers are great because they help vet potential franchisees, but they do take a commission. You can also market directly to franchisees by using an in-house or outsourced marketing team.
In any case, this is the reason why franchisors charge a “franchise fee.” The initial franchise fee is meant to cover the franchise broker’s commission or franchisor’s marketing expenses. This is why franchisors discount the franchise fee when franchisees open multiple locations.
What Happens if I do not provide an FDD to a Franchisee?
Failing to provide a franchise disclosure document (FDD) to potential franchisees is a violation of federal law and can result in fines and other liabilities. A franchisee can also break his or her franchise agreement, thereby leading to financial loss to a franchisor as well as harm to a franchisor’s reputation. Some states, like Illinois, require that franchisors register with the Franchise Bureau before offering the franchise to potential franchisees. We’ve also seen failing to provide FDDs correlate with poor franchise planning by a franchisor which results in territory disputes among the franchisees, resulting in further legal liability and harm to the franchisor’s reputation.
Contact Us to Franchise Your Business
We are Illinois and Franchise lawyers helping business owners scale their businesses through franchising. If you want to franchise your business, contact us today.