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Monday, May 24, 2010

Top Questions Asked by Prospective Franchisors

By Peter C King

Franchising is a long term relationship between the prospective purchaser of the franchise ("franchisee") and the business offering the franchise ("franchisor"). Businesses may look at becoming a franchisor after establishing a successful business that can be replicated in other geographic areas. One advantage of franchising is that the business can expand more quickly, however, utilizing the franchise system does result in control being lost by the business owner.

Question 1: What is the first step to franchising my business?
The most important issue in franchising is creating a business with internal procedures and processes that can be replicated in other geographic areas giving prospective franchisees incentive to purchase your franchise. The franchisor's job is to provide a turn-key operation that can be replicated all over the country and the world. There are typically two items that the franchisor grants to the franchisee, trademark rights and a prescribed marketing plan or way to run the business. The franchisee then pays a franchise fee for the right to participate in the enterprise and pays royalties to the franchisor for future sales.

Question 2: How do I protect my trademarks?
It is important that you have strong trademarks for your business which can be licensed to your franchisees. Trademark licensing is one of the most important aspects to franchising your business. The best way to protect your trademarks is to register them with the United Stated Patent and Trademark Office. This allows a presumption of validity, ownership and validity of the mark. After five years the added protection of incontestability is available as well. By registering the trademark constructive notice is given allowing the trademark owner preemptive nationwide superior rights even if the mark is not used in that geographic area. There is also state registration and common law trademark rights that offer less protection. These typically offer little value.

Question 3: How do I choose a trademark?
The goal is to select a strong trademark. The franchisor wants the trademark to be distinctive, unique and ultimately to become well known. This may require your business to select a new name. It is best to avoid descriptive terms which describe the product because they are not distinctive and do not offer much protection. Geographic names are also weak especially if the product originates from the region (i.e. Colombian coffee, Lancaster County Amish buggies, Idaho potatoes). Surnames are difficult as well because often the name is used somewhere else in the United States and limited protection is available. The best trademarks are often suggestive which suggest a link to the goods or services. An example would be Greyhound for bus services since people equate greyhounds as fast and therefore think the bus service travels as fast as a greyhound dog. Jaguar and Mustang for cars are similar examples of suggestive trademarks.

Question 4: I have a great concept can I start the franchise process?
Many times individuals will have an idea and want to get started franchising. This does not work. You need to have a business with at least a six month track record. The business has to be profitable and should be a turn-key operation.

Question 5: What type of capital is involved to become a franchisor?
You should definitely have at least $100,000 to $150,000 in capital to invest in the franchise program. This is often a difficult amount of money to raise because banks are cautious to invest in this type of venture and venture capitalists demand significant amounts of equity for the money. The best way to raise the money is often through family, a second mortgage on your home or from the existing business.

Question 6: Will I continue to run my business as usual after I start franchising?
No, after you undertake the franchising process your job will be to sell units and support the new franchises. Franchising is a different business from the one you currently operate. It is important to be clear that if you cannot put the time in to develop the new franchise you would be best to set aside the idea. Family factors should also be considered as well.

Question 7: What type of advisors are necessary for this process?
It is important to hire an experienced franchising consulting company to produce an operations manual, brochure, and website. Additionally, an accounting firm that works with franchises is invaluable since the financial disclosure document (FDD) requires an audited financial statement which must be updated annually. An attorney is integral to the process as well to create the FDD. This document will be given to prospective franchisees and gets filed in a number of states prior to selling the franchises in those states. The attorney will also draft the franchise agreement and other legal documents which define the franchisor's rights in regard to the franchisees.

Question 8: What are some other alternatives?
If your business does not have a track record of at least 6 months, or you do not have the time or resources available it is best to continue to run your business and revisit the franchising opportunity at some point in the future. If you are not completely committed you will likely waste time, energy and resources.

For more information on becoming a franchisor please contact Peter King, HAUSWIESNER KING LLP, 8300 Greensboro Drive, Suite 990 McLean, VA 22102 (703) 992-6790 or visit our website at

*This article has been prepared by HAUSWIESNER KING LLP for informational purposes only and does not constitute legal advice. Readers should seek legal advice from a licensed attorney in their state of residence.

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