Franchise Your Business

The Guide to Employing the Greatest Growth Strategy Ever

Mark Siebert

• Publisher: Entrepreneur Press
• Year: 2015
• ISBN:
  9781613083314
• Topic: Negocios y empresa
• Subtopic: Franquicias

Franchise Your Growth Expert franchise consultant Mark Siebert delivers the ultimate how-to guide to employing the greatest growth strategy ever—franchising. Siebert tells you what to expect, how to move forward, and avoid costly mistakes as he imparts decades of experience, insights, and practical advice to help grow your business exponentially through franchising.Learn how to:
Evaluate your existing businesses for franchisability
Identify the advantages and disadvantages of franchising
Develop a business plan for growth on steroids
Evaluate legal risk, obtain necessary documents, and protect intellectual property
Create marketing plans, build lead generation, and branding for a new franchise
Cultivate the franchisee-franchisor relationship

PART ONE

Exploring Franchising

CHAPTER 1

What Is Franchising?

“Do … or do not. There is no try.”

—YODA

Everyone knows what a franchise is, right?

It’s McDonald’s and Jiffy Lube and Century 21. It’s Subway and Massage Envy and Holiday Inn.

But many people would be surprised to hear that some of the biggest companies in janitorial services are also franchises. The same holds true for carpet cleaning, wood restoration, lawn care, and dozens of other industries. The largest providers of in-home, nonmedical care for senior citizens are franchises. And so are many of the world’s largest hotel brands. There are franchises that specialize in cleaning bathrooms and franchises that specialize in removing pet waste. You name it, and chances are it has been franchised.

How It Works

Generally speaking, a franchisee is someone who pays a franchisor an initial franchise fee, averaging close to $30,000 in today’s market, for the right to operate a business under the franchisor’s name using the franchisor’s business model. The franchisee furnishes all the capital required for opening the business and assumes full financial and operational responsibility for running the business. The franchisee generally will also pay a continuing royalty (usually between 4 and 10 percent of gross sales, or even higher) to the franchisor, and often the franchisee will buy products from the franchisor.

The franchisor, for its part, will allow the franchisee to use its trademark. The franchisor trains the franchisee to run the business according to its standards. The franchisor will generally assist the franchisee during the startup period, and provide ongoing support and assistance to the franchisee. The level, type, and quality of this ongoing support will often differ, but for many franchisors, it will take the form of advertising assistance, purchasing power, brand maintenance, financial guidance, and ongoing operational support.

Generalities aside, it is important to understand exactly what constitutes a franchise. Most people probably have a good idea of what a franchise is—at least we think we know one when we see one, even if we cannot define it. That said, the term “franchise” has a very specific legal definition within the U.S. and in other countries in which they are regulated.

The Federal Definition

In the U.S., the Federal Trade Commission in FTC Rule 436 (which was amended effective July 1, 2008) defines a franchise as a business relationship that has three definitional elements:

1. The use of a common name or trademark

2. The presence of “significant operating control” or “significant operating assistance”

3. A required payment of more than $500 in the first six months of operation by the franchisee (including initial fees, royalties, advertising fees, training fees, or fees for equipment)

The first element of this definition is self-explanatory. It is triggered by the right (not the obligation) to use the name. If a contract is silent on this issue, that alone may be enough to trigger the law. A good rule of thumb is that if you are hoping to avoid franchise laws by eliminating the trademark element of the definition, you should specify in the contract that your licensee is prohibited from using your name.

The “significant control” or “assistance” element of the definition can be triggered by any of at least 18 operational elements. The commentary to the original rule goes into detail here. It states:

Among the significant types of controls over the franchisee’s method of operation are those involving a) site approval for an unestablished business, b) site design or appearance requirements, c) hours of operation, d) production techniques, e) accounting practices, f) personnel policies and practices, g) promotional campaigns requiring franchisee participation or financial contribution, h) restrictions on customers, and i) locations or sales area restrictions.

Among the significant types of promises of assistance to the franchisee’s method of operation are a) formal sales, repair, or business training programs, b) establishing accounting programs, c) furnishing management, marketing, or personnel advice, d) selecting site locations, and e) furnishing a detailed Operations Manual.

In addition to the above listed elements—the presence of any of which would suggest the existence of “significant control or assistance”—the following additional elements will, to a lesser extent, be considered when determining whether “significant” control or assistance is present in a relationship: a) a requirement that a franchisee service or repair a product (except warranty work), b) inventory controls, c) required displays of goods, and d) on-the-job assistance in sales or repairs. (Emphasis added by author.)

The important point to remember is that just one of these elements could trigger the “significant control and assistance” element of the definition.

The FTC makes few exceptions. It does not include trademark controls designed to protect trademark ownership rights. It does not include health or safety restrictions. It does not include product-specific controls that do not extend to the entire business. But for the most part, the commission intends for this law to be interpreted broadly, and franchise lawyers will tell you that this particular element of the definition is probably the easiest to trigger.

The required payment element is interpreted in the same broad light. It is intended to capture any payment of at least $500 during the first six months of the franchisee’s operations. Quoting from the same commentary to the rule:

The Commission’s objective in interpreting the term “required payments” is to capture all sources of revenue which the franchisee must pay to the franchisor or its affiliate for the right to associate with the franchisor and market its goods or services. Often, required payments are not limited to a simple franchise fee, but entail other payments which the franchisee is required to pay to the franchisor or an affiliate, either by contract or by practical necessity. Among the forms of required payments are initial franchise fees as well as those for rent, advertising assistance, required equipment or supplies—including those from third parties where the franchisor or its affiliate receives payment as a result of such purchases—training, security deposits, escrows, deposits, nonrefundable bookkeeping charges, promotional literature, payments for services of persons to be established in business, equipment rental, and continuing royalties on sales.

The one exclusion from the rule involves the sale of inventory at a bona fide wholesale price. Again, quoting from this commentary:

In order to minimize ambiguity in this respect, but consistent with the Commission’s objective that “required payment” capture all sources of hidden franchise fees, the Commission will not construe as required payments any payments made by a person at a bona fide wholesale price for reasonable amounts of merchandise to be used for resale. (Emphasis added by author.)

Thus, if you sell someone goods for resale at a genuine wholesale price and do not take any other fees in the process, you will not trigger this element of the definition. But exercise caution: If you sell them products that are not intended for resale—for example, display merchandise, displays, point-of-purchase material, and other items they would not sell to customers—you may trigger this rule if the price exceeds $500.

In looking at this exclusion, one should note that nowhere in the commentary is there any mention that the franchisor must make a profit on these items to trigger the rule. For many, this element seems an oversight. After all, if they are not making a profit, how can they possibly be a franchisor? But those people would be well-advised to remember that the FTC’s intent in drafting these laws was to protect the person buying a franchise—not the franchisor. And if someone spends money, they are at risk.

What It Means to Be a Franchisor

If a business relationship has the definitional elements of a franc...