May 15, 2019
It’s not uncommon for anyone who builds a successful business to think they should turn it into a franchise. But becoming a franchisor is not as simple as selling the idea to an interested buyer. There’s a right way and wrong way to go about it - and Lane Fisher is one of the guys who can explain what the right way is in clear terms.
As a Franchise Attorney, Lane currently represents more than 500 franchise brands in business transactions and complex franchise litigation and is a member of the American Bar Association’s Forum Committee on Franchising. He deals with the legal side of franchising day in and day out. This episode is part one of a two-part conversation, so join us to learn how to consider whether or not you should become a franchisor.
If your first consideration when creating a franchise is not on how franchisees can clearly make money by purchasing one of your franchises, you’re missing the boat. You have to be clear on your value proposition. Can others model your success by building out a substantially similar business and making a profit doing so? Many wanna-be franchisors seem to think that a unique product will overwhelm the need to make money or that the franchisee will “figure it out” in a new location. That’s NEVER a good assumption to make.
The better your franchise concept performs from a profitability standpoint, the more everyone will be interested in it. If you bring a strong risk/reward proposition or have identified your highly efficient footprint to compare to other successful franchisors, you’ll be able to see if you are offering a better or worse economic opportunity. You must have translatable profitability that is related to a substantially similar business and can be articulated in writing. When you can provide that, you’re able to put it front and center when courting potential franchisees. The clearer it can be, the better.
There are advertisements out there promising to set people up with a Franchise Disclosure Document (FDD) for $5000. When I asked Lane about how reliable those documents really are, he said that $5000 will get you a template with names changed. That’s not ideal for something as important as creating a franchise model that works for you and your franchisees. A good FDD needs to be specific to your concept, well-written, proofread and corrected, and easily understandable. You can’t get that from a cut and paste template.
Your FDD also needs to clarify what conduct is required of franchisees in order to comply with the contract. Ambiguity is not your friend, it will wind up being problematic in the end. These are two examples of simple things that must be done in order to create a trouble-free relationship between you and franchisees and both happen through doing your FDD right. It’s worth investing in the creation of the most efficient, pointed document that’s correctly related to your business and expresses the obligations in the shortest way possible - in plain English.
It’s tempting to change the terms of your franchise agreement because you want to lessen the pain when a franchisee is considering your deal. Sure, make it as painless as possible, but not by modifying your agreement for every interested party. The more you make each franchise agreement a variation of the basic agreement, the more difficult it becomes to come up with a valid valuation of your company. That may not seem like a big deal now, but you may want to sell the company eventually or bring in additional investment capital. When you do, a consistent franchise agreement will make everything easier.
An important thing private equity firms and investors are looking for is uniformity in the offering. If you’re in the habit of making modifications to your basic agreement, you need to make that change IN the original agreement instead so your organization remains uniform. In that original agreement, you need to be able to articulate a bonafide reason why the language you are using is in the contract and who it is intended to protect. Clarity is your friend.
So once again - don’t get into the habit of negotiating franchise agreements. Instead, create an agreement that is fair to all parties, to begin with. When you do, you avoid unending negotiations which are counterproductive to scaling or selling your company.
I asked Lane to give me the top mistakes that franchisors make over and over - and he had so much to say about his first point that we never got to the next one. So be sure you listen to the next episode to hear those. What was his first point? He says every franchisor needs to have a very strong, protected trademark.
It’s essential for this reason: First, you need to be clear that you can legally use that name/mark. The name and business are indivisible, so you don’t want any doubt about who you are, what the business is, and how consistent and stable it has been over time (for the sake of potential franchisees as well as consumers).
You’ll also want to ensure that your franchise is a distinct entity from every other company out there. The only surefire way to do that is through the trademark research process and filing the trade name once you are sure you can do so without any kind of infringement. franchisees need to be assured that the name they are buying into is one they will have no problems with. Listen to learn more about why this is such an important issue.