Column: What to know about franchising your business

BY JULIE LUSTHAUS

If you are a successful business owner, franchising may be an attractive method to take your growing business ”” and profit margins ”” to the next level. Indeed, development of a franchise system can be a great way to help your business continue its success on a larger scale. With franchising, the brand grows but the unit investment and unit management costs are incurred by independent franchisees.

People often think “burgers and fries” when thinking about business systems that are franchised. However, the world of franchising is quite diverse, and business systems in many different industries are developed through franchising. In addition to restaurants, other sectors include retail, hospitality, real estate, optical, recreation, business services, child care and home improvement services.

Julie Lusthaus

Generally, franchises fall into two categories. They either operate in the retail sector or in any of the service industries. For retail franchises, franchisors may offer anything from full store franchises to kiosk franchises to store-in-a-store franchises that offer all product lines, one product line or a combination of the product lines. Similarly, for service franchises, franchisees can offer a full assortment of services, one specific service or a combination of services. The types of franchises that may be offered are varied, each as unique as the particular business model developed by the franchisor.

The concept

Franchising is a method of expanding your business by licensing your trademark and business system to a franchisee who pays you a fee for the right to operate a franchise using your business system and your trademark. The franchisee will conduct its business operations in accordance with standards and specifications you establish.

Along with granting the right to use the franchisor”™s trademark and business system, franchisors will typically provide franchisees with preopening training, post-opening training and overall support.

The advantages

Because franchisees incur the costs of opening their own unit, franchising will allow you to expand your business without expending significant capital per unit. Keeping your costs low per each unit reduces your risk while increasing the overall return on your investment.

Franchising also allows you to grow your business on a much faster level than you would generally be able to do on your own. Additionally, not having to manage each unit on a day-to-day basis will allow you to devote more time to developing your brand and strengthening its presence in the marketplace.

Many other advantages exist, including reducing your exposure to risks relating to signing leases, additional financing and vicarious liability for acts of employees.

Deciding to franchise

The following are some of the questions you should think about to help you determine whether you can franchise your business:

Ӣ Do you have a proven business concept?

Potential franchisees want to know that your franchise business concept has proven to be successful. Success can be measured in many different ways, including the profitability of your business, the number of years you have operated your business, the number of units you have operated, the size of your operation and the strength and awareness of your brand.

Ӣ Do you have a strong brand?

Other than the value of the knowledge of how to operate your business, much of the value associated with purchasing a franchise is attributed to the strength of the brand. Is your brand known?

Ӣ Can you teach others how to operate your business?

One of the keys to franchising is teaching franchisees how to duplicate the way you operate your business. The easier it is to teach your proven business methods to a franchisee, the quicker it is for that franchisee to be up and running, and the likelier that franchisee will be able to duplicate the success of your business.

Ӣ Does your business have regional, national and/or international appeal?

The more marketable your franchise system is across various geographic areas, the greater the chance of success for your franchise system. Some franchise concepts do not work in certain geographic areas as well as in others. It is important to understand how marketable your franchise concept is and what geographic areas your franchise concept would appeal to. This market analysis would help you maximize the potential of your franchise system in those geographic areas that your franchise would operate in.

What you need to know

Before a franchisor is legally permitted to sell a franchise, the franchisor must comply with certain rules promulgated by the Federal Trade Commission and/or statutes enacted by the state the franchisor is selling from or the state the franchisor is selling into. The purpose of these is to require the franchisor to provide the potential franchisee with information for the franchisee to use to make an informed decision as to whether to purchase the franchise. This information is contained in a Franchise Disclosure Document. Some states, such as New York, require franchisors to register their disclosure documents with the state before offering franchises for sale.

If you are considering franchising your business, be sure to speak with your professional advisers such as a franchise attorney and your accountant before taking any steps to franchise your business.

Attorney Julie Lusthaus is a partner in the firm of Einbinder & Dunn LLP, with offices in White Plains and Manhattan. She focuses her practice in the area of business and franchise law. She can be reached by phone at 914-664-8040 or by email at jcl@ed-lawfirm.com.