Like any business expansion, franchising requires significant investments in documenting and structuring the franchise system. These costs vary, but the cost to create the franchise system may be less than the cost to open an outlet yourself.
The cost to create a new franchise system varies quite a bit based on the size of the system, the number of states that the franchise will be offered in, and the complexity of the franchise system. For example, some franchise systems contain complex fee structures and territorial restrictions. Those types of franchise systems require more complicated Franchise Agreements. Also, companies with a long history or intricate supply relationships need additional provisions in the Franchise Disclosure Document and Franchise Agreement.
Creating a new franchise system requires both legal expenditures and business expenditures:
Creating a new franchise system requires legal expenditures to form the new franchising company, obtain a federally registered trademark, and document the franchise and register in specific states, For most start-up franchise systems, Larkin Hoffman provides flat-fee services to form the new franchising company, obtain a federally registered trademark, and prepare and register a Franchise Disclosure Document, Franchise Agreement, and ancillary contracts.
Registration States vs. Non-Registration States vs. Business Opportunity States
In addition to our professional fees, the current state franchise registration fees (for initial franchise registrations and for annual renewals) are as follows:
|Registration State||Initial Filing Fee||Annual Renewal Filing Fee|
If there is a material change to the franchise system, offering, or the franchisor during the year—even before the annual renewal is due—the registration states require that the franchisor file an amendment filing. The filing fees are between $50 to $250 per state for amendment filings.
The other 36 states (the “non-registration states”) don’t require the registration of a franchise system; however, a Franchise Disclosure Document in compliance with federal law must still be given to any prospective franchisee in these 36 states. Further, nearly all 50 states have business opportunity laws which have filing fees that may apply to any franchise offered in that state, though there are often ways around those requirements by federally registering a trademark and otherwise complying with federal law regarding the disclosure of a FDD.
The Franchise Disclosure Document, Franchise Agreement, and ancillary contracts we prepare will allow you to sell franchises in multiple states. Specifically, we will prepare a “multi-state” FDD, which can be used to sell franchises in all 36 non-registration states (provided you disclose the FDD to prospective franchisees) and any of the 14 registration states you desire to register in. We can also avoid any business opportunity registration requirements in any state if your franchise system’s trademark is federally registered and you otherwise comply with federal law regarding the disclosure of a FDD.
Creating a new franchise system also requires business expenditures to systemize your franchise system by developing operating manuals and training programs for franchisees, marketing materials for the sale of franchises, to employ a salesperson or team, and to otherwise support your franchisees on an ongoing basis.
When you consider whether to franchise your business, compare the costs described above with the cost of opening another location for your business by yourself. Often, the cost for setting up the franchise system, and annually updating and renewing the franchise system, is less than opening your own outlets. Further, after you pay the initial costs to set up the franchise system, most of the remaining costs and risks of expansion are on the franchisees.