FAQ's FREQUENTLY ASKED FRANCHISE QUESTIONS

FROM THE FRANCHISOR’S VIEW

1. What is a franchise?

Under the legal perspective, a franchise is a procedure by which a business model is structured and offered for sale under an unique trademark in compliance with the Franchise Rule as promulgated by the FTC and in compliance with the requirement of such rule and any other applicable legislation promulgated by the States which supplements the FTC Rule.

From a business perspective, a franchise is a duplicate of a business model under a given trademark, that provides either proven know-how, business procedures, distinctive services or products and other standard procedures that will make buyers road to start-up by far shorter and with more probabilities of success.  In essence, that is what a franchisor charges for.

2. What kind of businesses can be turned into a franchise?

Indefinite categories of businesses of any kind can be converted into a franchise system, as long as you have a distinctive trademark and business process to work the day to day operations of that business.  Of course, some businesses are more friendly, popular and simple than others, but even the most simple business, can be turned into a very distinctive franchise, it just requires a good dosage of creativity and imagination.

3. What are the minimum requirements to convert my business into a franchise?

Although it is not necessary to have an operating business in place it would be highly recommended to have tried the business model yourself before converting it to a franchise.  There are Franchisors out there that can build a franchise in theory and sell franchises without having a wholly own location, and in many cases they turn to be successful because of their experience in putting these together.  Notwithstanding, the norm is that after you turn a business into a successful and unique business model with distinctive characteristics and trademark, then it makes more sense to turn it into a franchise model.

If we are to mention requirements, we are to divide them into two groups:  legal requirements and business requirements.  Among the legal requirements we can mention: a) Prepare all the documents necessary to offer and close the sale of the franchise, specifically the Federal Disclosure Document (FDD) prepared in compliance with the FTC Rule, which shall include an assortment of addendums, including the standard franchise agreement proposed to buyer;  b) In the case of states that require specific registrations (approximately 14, CA and NY among them), you must comply with the state registration requirements before you sell or in many case before you even offer the franchise.  Many of them will even require local trademark registration and advertising requirements, not to mention insurance bonds and local resident agents.

4. Do I need businesses entities such as corporations or LLC’s to set up a franchise structure?

Technically, you may handle any business venture as an individual doing business as (d/b/a) or as partnership between various individuals, even large or complex businesses.  Notwithstanding, even the most general practitioner attorney or accountant will point to you a diversity of reasons to avoid that.  Among the reasons for which you may want to choose corporate or limited liability entities (among others) to serve as the shell of your business are the following:  a) protect your personal assets and yourself from the liabilities that may arise from the business; b) better distribute your business income for tax strategy; c) benefit from state exemptions when you register in certain states; and several others.

As an example, under a typical structure of a business that is in the Ice Cream parlor retail,  you may have Corp. 1  as the Franchisor,  Corp. 2  as the trademarks holder;  Corp. 3  as the Ice Cream manufacturer and distributor; and a separate Corp. For each wholly own location.  In this scheme, each corporation has its own responsibility and liabilities.  Depending on the corporate functions, there might be advantages of incorporating in certain states, such as manufacture tax incentives or low cost for labor and power.

5. What is the Franchise Rule?

Is the nickname for the federal regulation issued by the Federal Trade Commission (FTC) for the regulation of the structuring and offering of franchise system in the U.S.A (territories included: Puerto Rico, USVI, Samoa and Guam).  The main purpose of this regulation is to uniform the requirements imposed to franchisors and procure a minimum standard protection to consumer, in this case, the franchise buyers.  Although the regulation serve a purpose of imposing the same requirements to all franchisors and restrict the unfair competition, in the other side it serves the main purpose of protecting the consumer and safeguard the prospective buyer’s rights.

The main role of the Franchise Rule is to establish the minimum requirements and disclosures that a Franchisor must give a potential buyer to guarantee a fair play, including the obligation of Franchisor to supply within a minimum term, the final franchise agreement that would be signed by the buyer.

The FTC Franchise rules requires that Franchisors disclose a diversity of information to Franchisee as part of the offering, which all together is know as the Federal Disclosure Document (FDD, formerly UFOC).  The purpose of said disclosure  is that potential buyers have the necessary information to make an informed decision as to whether it is worth to get into said franchise venture.  The information contained in the FDD also serve as a base information to investigate more in detail the business aspects of the franchise being offered.

Among the disclosures are:  history of company and principals, description of business model, fees to be charged, franchise terms, description of trademarks, litigation pending during last fiscal year, financial statements, if bankruptcy filed, tables of franchise locations with addresses (including those that closed),  approximate investment.  For the benefit of both parties, it is highly recommended that the potential buyer reviews the FDD with an attorney and/or accountant, that way he can’t raise the defense of being mislead as a “lay man”.

6. What kind of information do I need to disclose if offering franchises?

Among the disclosures are:  history of company and principals, description of business model, fees to be charged, franchise terms, description of trademarks, litigation pending during last fiscal year, financial statements, if bankruptcy filed, tables of franchise locations with addresses (including those that closed),  approximate investment.  For the benefit of both parties, it is highly recommended that the potential buyer reviews the FDD with an attorney and/or accountant, that way he can’t raise the defense of being mislead as a “lay man”.

7. Do I have to comply with any laws if I turn my business into a franchise?

Yes. The Franchise Rule is the main rule to follow as it serves the purpose of uniform the offering of franchises in the Unites States and its territories.  Notwithstanding there are diverse laws and regulations that you will need to follow, such as:  a) specific franchise laws of the states that require registration, b) state laws that imposes specific advertising regulations, c) trademark law to manage your trademark portfolio,  d) local advertising laws and advertising regulations from the FTC when advertising your franchise offer, e) local distribution laws that may have an effect on your franchise model, f) state contract and antitrust law, and many others.  It is highly recommended that you ask your attorney on these laws and you may have to hire local attorneys for main markets that are highly regulates, such as NY and CA.

8. What would be a basic team to move a franchise forward?

You need to start with an attorney with reasonable experience in franchising law, following with a marketer with social networks’ skills, an accountant with tax experience and a franchise broker or salesperson with sale skills, and do not forget your webmaster. You may also want to join a couple of prestigious associations, such as the IFA.

9. Can I sell a franchise anywhere after I form it?

Not necessarily.  When forming a franchise system and complying in general with the Franchise Rule, you would be able to offer and sell your franchises in all states except those states that require specific registration, which are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin.  There are other states that have Business Opportunities Laws that have to be complied with, such as Florida, that requires that you file for an exemption, provided that you are in compliance with the Franchise Rule and subject to annual renewals.

In terms of international markets, you may use your U.S. materials provided that you amend them to conform to any law or regulation of the particular country.  You will also have to protect first your trademark in each of said foreign countries and in some cases make your local corporate registration.  Some countries will also require specific registration.  You may wish to contract a franchise attorney with international network of foreign attorneys.

10. Can I terminate or dissolve a franchise system if does not work out?

Termination causes must be specifically underlines within the Standard Franchise Agreement, in which case it depends on the content of the franchise agreement.  The complex questions would be, can I terminate or dissolve without having any problem with the franchisee?  Again, this question will have to be answer case by case.  The better protected you are in the franchise agreement, the less consequences you would have as an effect of termination.  Special consideration would be given by a Court if what triggers the termination is the giving of misleading information (even if involuntarily) or acting in bad faith, fraud or other misconduct.

11.  FAQ's from the FTC:  click here