Six Things To Consider When Deciding Whether To Offer Franchises

By Dan Block

1.         Franchising is a good way to expand your business to new cities and states and with multiple locations—but without the high capital costs required for expansion with additional company-owned stores, restaurants, or other types of outlets.

2.         The franchisor of a well-run franchise system can be considerably more profitable than if the same company consists only of company-owned outlets.

However:

3.         Franchising is a heavily-regulated industry, both at the federal and state level.  Thus, establishment of a franchise system involves substantial up-front and ongoing costs, and a commitment of time and effort to the establishment and development of the system.

And be aware:

4.         To avoid legal compliance costs, some business owners try to avoid franchise laws by claiming to be just licensing the trademark of their business and/or by referring to the agreement between it and the purchasers of its business concept as a “License Agreement.”   However, the name given to the relationship and the name of the contract between the parties are not determinative.  Instead, what matters is whether the relationship between the parties qualifies as a “franchise” under federal and the applicable state laws.  For more information about franchises and “true” licenses, see the article, “If it looks like a duck, quacks like a duck . . . It’s a franchise,” in the “News” section of the Robinson Waters & O’Dorisio website.

But, consider the following:

5.         The establishment of a franchise system can make your business concept much more attractive to potential purchasers than if it is offered under a trademark licensing arrangement.  That is because under a licensing arrangement, the seller of the business concept is significantly restricted in the types of assistance and protection that it can offer to the purchaser.  A franchise can include assistance and protection that cannot be offered under a license.

6.         The owner of the business concept can legally put considerably more controls on the purchasers of the business concept under a franchise relationship than under a trademark license arrangement.