Duplicating Successful Business Methods Through Franchising
Before looking into franchising a new idea for a successful business, it is important for an entrepreneur to understand the conceptual dynamics of franchises and the franchise arrangement. Franchising can be an excellent way to expand a business. By cloning proven business and marketing techniques and finding others willing to invest their time and money to help grow a business concept, a proprietor can use franchising to obtain growth rates much higher than if he or she were restricted to opening more units on their own.
It is important to realize, however, that the primary reason people will pay you for a franchise is to minimize the risk of them starting a new business venture from scratch. Potential investors are looking to purchase the right to duplicate a tried and tested approach to a business that has already been proven to be successful. Ideally, the flagship operation will have already developed strong consumer loyalty and a degree of brand equity before franchising is considered. Franchising is certainly not the proper approach for a business idea that is still in the conceptual stages of development. In order to attract others to your venture, you must have an established operation that has been tested under real market conditions.
The cornerstone of a successful franchises and a successful franchise system is a trademark for the product or service provided. In its most rudimentary form, a franchise agreement is a license from an owner of a trademark giving another the right to sell a product or service under the mark. In this regard, it should be noted that all of the legal ramifications governing trademark licenses apply equally to a franchise agreements. The franchisee essentially agrees to pay a fee to the franchisor in exchange for permission to operate a business or sell a product or service in accordance with tested methods and under the established trademarks of the franchisor. This fee is often broken down into an initial fee and subsequent periodic royalty payments.
The franchisee is usually granted an exclusive territory and is assured that he will be the only distributor of the particular goods or services in the area. The franchisor, on the other hand, is typically obligated under the franchise agreement to assist with advertising, promotion, research and development, training, education, and management assistance. It is also common for the franchisor to assist with quantity purchasing issues and publicity and media relations.
A franchisor must provide a prospective franchisee with a Uniform Franchise Offering Circular (UFOC). This must be given to the prospective franchisee at the first personal meeting, if you have a personal meeting with the franchisee. In all cases, the UPOC must be given to the franchisee at least 10 days before the franchisee signs any agreements or pays any money. Before an initial meeting, it is common to have a potential franchisee fill out an application. Once the application has been filled out, you will have a pretty good idea of the applicant’s educational background, employment history, economic situation, and any other relevant information desired. After reviewing the application, you can decide whether or not to pursue the franchising opportunity with the applicant. If you decide to go forward and meet the potential franchisee, you should give them the UFOC at this meeting. The franchise agreement is an exhibit to the UFOC, so for all practical purposes, you should have both documents available at the first substantive meeting.
Violation of various franchise and business opportunity laws may result in civil and criminal penalties. If you are considering the expansion of your business by offering franchises so others can duplicate the success of your business, it is important to obtain competent legal advice.
If you would like to speak to an attorney about franchises or your particular situation, please do not hesitate to call our office.
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