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.
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.