In many new franchise systems, the most important element of the brand is the common name under which each franchised outlet operates. If you are considering expanding your business by opening additional locations or franchising, before you get too far into the process, consult with trademark counsel to be certain you have a name that can be registered as a trademark with the United States Patent and Trademark Office.
Our last post, New Franchise Offerings Continue to Expand, talked about the explosive growth of franchising over the last several decades. Larkin Hoffman has been helping entrepreneurs franchise their businesses for more than 40 years, and we thought a look back at some of our original franchise clients would be instructive to people seeking to franchise their businesses today. In 1977 and 1978, we helped 3 companies franchise their businesses.
New franchisors often come to us with one of two directives; “write an airtight franchise agreement that I can terminate if my franchisees do not do what I want them to do,” or, at the other end of the spectrum, “we want an agreement that is short, fair and neutral.” The best agreements lie in the middle, and for good reason.
How much money can I make?
The first question on the mind of most prospective franchisees is “how much money can I make?” By law, financial performance information, or “FPRs,” can only be provided to prospective franchisees in a franchisor’s Franchise Disclosure Document. Many franchise attorneys have historically advised their clients against including FPRs in their disclosure documents out of fear that franchisees will not perform as well and the franchisor will be sued over its FPR. However, the rules have changed, and today, most new franchisors are, and should be, providing this information to prospective franchisees.
The financial information you provide will typically be actual historical results based on the existing operations of your company-owned outlets, with adjustments to show any additional costs your franchisees may have – such as royalties and advertising contributions. For many years, franchise examiners in some of the franchise registration states refused to allow franchisors to provide information to prospective franchisees based on company-owned outlets. The rules changed last year to specifically allow an FPR to be based on company-owned outlets. The new rules essentially give franchisors a road map as to how to prepare an FPR from their company-owned outlets, including what they can and cannot include.
We have always advised our franchisor clients to include financial information on their existing outlets in their Franchise Disclosure Documents. How else can a prospect make an informed decision whether or not this is an appropriate investment for them? If you have even one operating outlet, you have financial information you can provide, though we have always suggested that a company have financial information from at least two outlets before including financial results in their Franchise Disclosure Document, just because one outlet could turn out to be an aberration.
As a result of the changes in the disclosure laws over the last 10 years, and especially the latest changes, most franchisors are now including FPRs in their Franchise Disclosure Document. If you are a would-be, or existing, franchise company, and you are not providing this information, you should think about doing so or you will be at a competitive disadvantage when seeking out prospective franchisees. If you have questions about how to do so, and what you are permitted to do, we can help you.