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.
Running a franchise company is a completely different business than selling products or services directly to consumers. As a franchisor, you sell the right to use your brand and system (i.e., the franchise) to franchisees who in turn sell products or services to consumers using your brand and system. Many new franchisors are caught of guard by the change in business model once they take the leap to franchising. As a successful franchisor, you have to balance the growth of the brand and the overall health of the franchise system with the needs and wants of franchisees—sometimes your objectives and franchisees’ objectives are aligned, and sometimes they are not. The franchisors that survive and continue to expand are those that understand how to run a franchise system.
You will find a lot of guidance on running a franchise system as a franchisor on this blog and elsewhere on the Internet, as well as through industry associations, including the American Bar Association’s Forum on Franchising and the International Franchise Association. We would also recommend that startup and emerging franchisors read a new book, Franchise Management For Dummies, co-authored by Michael H. Seid and Joyce Mazero. Although the book focuses on both franchisors and franchisees, it discusses creating marketing plans and branding and the secrets to continued success and future expansion.
The co-authors answered some questions regarding Franchise Management For Dummies in a Q&A published in Franchising World, a publication of the International Franchise Association. Mr. Seid made a key observation for any entrepreneur looking to franchise his or her business:
Most important for prospective franchisors is to understand that there are consultants and lawyers that we call franchise packagers. They offer cookie-cutter services — and that is a serious problem. Pick your advisors carefully and talk to their clients to understand their reputations.
Q&A with the Authors of Franchise Management For Dummies, June 05, 2017, Robert Cresanti, International Franchise Association.
In a previous blog post, I talked about picking between a franchise law firm and a consultant. As noted in Franchise Management For Dummies and on this blog, the franchise relationship between a franchisor and a franchisee is both a business and a legal relationship. Franchising is governed by complex state and federal laws regarding the offering and selling of franchises and the ongoing relationship with franchisees, including renewal and termination. Franchise law firms such as Larkin Hoffman are subject to ethical rules which require us to advice clients based on their best interests. Consultants, while they may be engaging in the unauthorized practice of law, are not subject to these same ethical rules. The Larkin Hoffman Franchise Team will not recommend franchising a business if we feel that franchising is not the best growth strategy or that the business is not ripe for franchising.
Mr. Seid continues in his Q&A noting that even among franchise law firms, not all franchise law firms are created equal. Franchising is a niche area of law. When choosing a franchise law firm, review the credentials and experience of the franchise lawyers and do your research on the reputation and work product of the law firm. You may want to talk to current clients of the law firm on their experience working with that law firm.
Picking the right partner in structuring your franchise system at the onset is important to ensure your franchise system starts on the right path. Remember, you will be signing 5 to 20 year franchise agreements with franchisees, so the terms you set in the beginning will govern the franchise relationship between you and your franchisees for the duration of the franchise term. Choose wisely.
Chuck Modell, Joe Fittante, Andrew Perrin, and Jim Susag have been listed in the International Who’s Who Legal: Franchise 2016, published by Who’s Who Legal. The list is made up of franchise attorneys identified through comprehensive and independent surveys of peers in both general counsel and private practice positions worldwide. By receiving this honor, these four Larkin Hoffman attorneys are recognized among fewer than 200 leading franchise lawyers in the United States.
Attorneys in Larkin Hoffman’s franchise and distribution practice advise owners of franchise companies on issues such as methods of expansion, preparation and registration of franchise documents, and the maintenance of franchise relationships. The firm represents franchisors in many industries including food and beverage, medical services, home inspection, travel, real estate, retail, hospitality, and information technology.
Most entrepreneurs looking to franchise their brand or concept retain a franchise consulting company or a franchise law firm to structure the franchise system (such as royalties and fees, territories, and sales restrictions), to document the structure (in a Franchise Disclosure Document and ancillary contracts), and to register the franchise offering in the states that require registration. However, franchise consulting companies are very different from franchise law firms, and picking the wrong partner to assist you in launching your franchise system can be detrimental to the system’s future growth.
Many franchise consulting companies exist, which provide startup franchising services, including structuring, documenting, and registering. Franchise consulting companies are entities with the goal of encouraging you to franchise your brand or concept—even if doing so may not be in your best interests (see our Franchising Feasibility Test to determine whether you should or could actually franchise your brand or concept). Further, these franchise consulting companies are not law firms. Yet the franchise relationship between a franchisor and franchisee is a legal relationship, involving:
- One or more contracts between the franchisor and franchisee and a detailed Franchise Disclosure Document setting forth the rights and restrictions of the parties as mandated by state and federal law. Most franchise systems will have various contracts between the franchisor and the franchisee, including a franchise agreement, lease/sublease, and technology licensing agreements.
- Complex state and federal laws governing the preparation of the Franchise Disclosure Document, registration of franchise offerings, the offering and selling of franchises, and terminating or not renewing a franchise.
Would you hire a non-attorney to prepare your estate plan or prepare or review a lease agreement? Of course not! Similarly, only a law firm experienced in franchising can craft these contracts and interpret and maneuver through state and federal laws. It’s also important to remember that, unlike many franchise consultants, the Larkin Hoffman Franchise Team can assist you in managing your relationships and disputes with franchisees (including handling defaults and terminations), as permitted under state laws, on an on-going basis.
Finally—unlike franchise consulting companies—Larkin Hoffman is subject to state practice of law ethical rules which require us to diligently act in the best interest of our clients. Therefore, the Larkin Hoffman Franchise Team will not recommend franchising a business unless we feel that franchising may be a viable growth option in our professional opinion. And at every step of franchising, with over 40 collective years of franchise experience, the Larkin Hoffman Franchise Team brings practical business advice in structuring and operating your franchise system.