We’ll form a new business entity (typically a limited liability company or ‎a Subchapter S corporation) which will serve as the “franchisor” in the franchise system, own ‎the trademark(s) and other intellectual property (or at least have a license to further ‎sublicense the same to franchisees), offer and sell franchises, and provide franchise training ‎and support services.

Limit Liability

If you currently operate or anticipate operating company-owned stores in addition to ‎franchised stores, separate business entities for franchising and for the company-owned ‎stores can limit your liability by shielding the assets in one from the other in the event of a ‎claim against one of the business entities.‎

Reduce Audit Costs

Further, with a separate franchising company, you can significantly reduce your financial audit ‎costs as required by federal and state franchise laws. Specifically, Item 21 of the Franchise ‎Disclosure Document requires that you include audited financial statements for the past 3 ‎years for the franchising company. If you create a new business entity for franchising, the ‎initial audit would be conducted by your accountant on a new company without operating assets or ‎liabilities and not on a currently-operating business entity that might own and operate a few ‎company-owned stores, thereby significantly reducing the costs to prepare financial ‎statements. Also, Item 21 only requires audited financial statements from the inception of the ‎franchising company, and so you don’t need to disclose 3 years of history initially. Then, in ‎subsequent years, when you renew your franchise filing, your accountant would only need to ‎audit the franchising company and not the business entity owning and operating the company-‎owned stores. This reduces time, costs, and the amount of information you have to publicly ‎disclose.

Previous: Step 4 – Preparation of FDD
Next: Step 6 – State Registration(s) & Sale of Franchises