IS MY BUSINESS RIGHT FOR
FRANCHISING?
One of the most common questions we get from business owners is whether their business is right for franchising. Here are some of the questions we go over with our clients when we help them consider whether franchising is the right growth strategy for them:
We believe this is one of the biggest threshold questions that needs to be answered. Take a moment to consider a typical franchise relationship. A franchisee is considering getting into business, but doesn’t necessarily have the know-how to do it on their own. The franchisor teaches the franchisee everything they know about the business up front, and the franchisee thereafter pays a royalty throughout the entire term of their relationship in exchange for operating as part of the franchise system.
As years go by, it is a common feeling for franchisees to feel that they are paying a royalty for things they already know, since it has been taught to them from the start. The best franchise systems have a common proprietary element that operators cannot get somewhere else and continues to tie the network together past the initial “honeymoon” period – whether it be a literal secret sauce (or proprietary recipe), a technology platform that allows the business to operate and is not available elsewhere, a product or series of products that have been developed for the system, or some other proprietary element.
Consider whether, outside of the brand name, your business has this stickiness factor and if not, whether you can develop one before launching!
Brands often develop as they learn over time. Many business owners launch their first location with a set of ideas and assumptions, that they later learn may or may not have been correct. Most entrepreneurs that we work with tell us that if they knew when they started what they know now, they would have _______ (fill in the blank: leased a bigger space, leased a smaller space, added a different service element, simplified their menu, worked with different vendors, offered a different pricing model).
This experience is exactly what franchisees are paying for when they enter the system. That said, a good franchisor will actually build-out and test what they consider to be the actual franchise “model” location. The model is, in a vacuum, the ideal set of circumstances that a business under the brand should have to operate – size, location, services, pricing, etc.
Although companies aren’t required to have a model location actually established to begin franchising, it certainly helps franchisors provide relevant information to their franchisees, and also have a showcase location to show and train franchisees and prospective franchisees.
Piggybacking off of the idea of having a proven model, good franchisors also have a brand that is differentiated in its market and poised for growth. When considering whether to buy a franchise, franchisees will ask the franchisor why they should buy into their brand.
Whether it’s a new type of offering in the industry, or whether the franchisor has a new approach to go to market, franchisors should consider what makes them different and worth buying into.
And, since a big part of a franchisor’s success is the long-term success of a franchisee, the franchisor should also feel confident that their concept has the staying power to be successful in the marketplace, despite industry trends and changes in the competitive landscape, through the long-term franchise relationship.
Franchising is about relationships. Although a contract ultimately governs the legal obligations of the parties, the majority of the relationship between a franchisor and franchisee is established by trust, communication, processes, and problem resolution. Without these elements, franchisors are rarely successful in getting buy-in from their franchisees, and ultimately, selling new franchises.
Before franchising, the company is first a business owner and expert in the industry in which they operate. Their customers are the people who buy their product or service. Many franchisors are required to shift their way of thinking to focus on their new customers – their franchisees – and concentrate time and effort on managing franchise relationships.
As we hopefully have hammered home in the above, launching and growing a franchise system does take an investment of capital, know-how, and talent. In order to properly establish appropriate systems, technology, and support structures, most start-up franchisors are required to hire team members and bring on new technology and systems that come at a cost.
At a minimum, we recommend that franchisors, either internally or externally through vendors, have a plan for the following functionalities: executive leadership (overseeing and adapting the brand), franchise sales and development, marketing and advertising support, compliance, and business coaching and support.
Some of these roles may be played by the same individuals at first, but we do recommend that the franchisor establish a plan to cover these needs with individuals with the appropriate skill sets.
How Is Your Endurance? Franchise agreements are typically longer-term agreements, as franchisees want to ensure they have time to obtain a return on their initial investment in establishing their business. Common agreement terms are between 5 to 10 years, with rights to renew the agreement for ongoing additional 5 to 10 year periods.
Once a franchisor signs one of these agreements, they are contractually obligated for the long haul. Although there are always exit strategies that franchisors can pursue, absent divesting, a franchisor will be tied to the system and the brand for the long-term.
We often counsel our clients to consider this and where they are at in their career, goals, and personal lives – and ensure that they have the stamina and energy to lead the system and perform their obligations as may be required.
KEY COMPONENTS OF A
FRANCHISE SYSTEM
While meeting legal requirements is one of the most important aspects of establishing a franchise system, three other aspects are equally crucial:
LEGAL REQUIREMENTS OF A
FRANCHISE SYSTEM
One of the most common questions we get from business owners is whether their business is right for franchising. Here are some of the questions we go over with our clients when we help them consider whether franchising is the right growth strategy for them:
What is an FDD? Before you may offer a franchise to any potential buyer, you must give them a Franchise Disclosure Document, or FDD. The purpose of this legal requirement is to protect potential purchasers of franchises by giving them a standardized document that provides them with key information about the franchise opportunity.
The United States has a complex patchwork of state and federal franchise laws, as well as business opportunity laws that can also come into play. For each potential buyer of your franchise, you need to ensure you are meeting federal law as well as any applicable state laws, which usually depend on where the buyer resides and plans to operate the franchise.
Every FDD contains 23 “Items” as well as certain prescribed exhibits. These “Items” cover topics that regulators have determined are most relevant to prospective buyers of franchises. They include information about the franchisor, its leaders, its history, costs and information about business operations. When all is said and done, the FDD with all its exhibits typically runs 200 to 300 pages or more.
While they often get lumped together, the FDD and Franchise Agreement serve separate purposes. The FDD is designed to inform potential buyers, through a series of required disclosures, key information about the franchise. The Franchise Agreement, which is an exhibit to the FDD, is the legal document that the parties will sign that will govern their relationship during the term of the franchise. The Franchise Agreement sets out the specific legal obligations that each party has.
At the state level there are various franchise registration, filing, disclosure, and relationship laws that franchisors must follow. As noted above, the United States has a complicated patchwork of franchise and business opportunity laws. States that require FDD registration are known as the franchise registration states. These states typically have the most strict franchise laws and most rigorous registration process that requires an annual renewal after the initial registration. Another group of states are known as franchise filing states that typically have a less stringent process and require either one-time or annual state franchise filings. The third group of states are non-registration states that do not require any state specific FDD registrations or filings
One of the required exhibits to the FDD is a set of financial statements. The general rule is that the franchisor entity must include its last three years of audited financial statements. Because new franchisors usually form a new corporate entity to sell franchises, new franchisors often will not have three years of statements and will include only those statements since the formation of the entity. Additionally, under the federal and most state franchise laws, there is an exemption from the requirement that statements be audited during the first full or partial fiscal year of franchising. A handful of states, however, have heightened requirements for the first year, such as an audited opening balance sheet. So whether you will need audited financial statements will depend on which states you wish to be registered in to sell franchises.
We are often asked if it is possible to avoid the need for a franchise system – and thereby avoid the need to create and FDD and comply with all the federal and state franchise laws – by simply “licensing” a business idea rather than franchising it. The short answer is that it is very difficult – and in many scenarios nearly impossible – to structure a legal licensing relationship that allows a third party to operate a business under your name and systems that does not fall under the franchise laws and regulations. If this were a more viable option, most businesses would opt to license their business to avoid the more onerous franchise regulations; for that very reason, however, the legal regulations capture almost all such relationships other than true product licenses. A limited number of exemptions from the franchise disclosure and registration requirements are available, and we can help you explore those if they make sense for your situation.
COSTS OF A
FRANCHISE SYSTEM
One of the initial questions potential franchisors inevitably ask us is what sort of budget is needed to establish and launch a franchise program. Unsurprisingly, the overall cost can vary widely, depending on how mature your business is, how big (or small) your existing staff is, how quickly you want to grow, and how much of the initial work you want to take on yourself. Other variables include whether you already have a federally registered trademark, how easily you can scale your current website, and how much legal work is needed to establish a new entity to serve as the franchisor.
In addition, you may want to hire a franchise consultant to help you refine your model or develop a sales plan. Consultants may cost anywhere from $5,000 to $50,000. You also may want to partner with franchise brokers to help sell franchises. Brokers typically collect a percentage of the initial franchise fee and may require an up-front and/or periodic retainers.
For planning purposes, here are some back-of-the-napkin estimates
Legal Documents (including FDD, Franchise Agreement): $22,000 - $34,000
Federally Registered Trademark: $0 - $4,000
New or Modified Legal Entity: $1,000 - $7,000
Operations Manual ($0 if you do it yourself): $0 - $20,000
Audited Financial Statements: $1,500 - $3,000
New or Upgraded Website: $4,000 - $25,000
Sales and Marketing: $0 - $20,000
State Registration/Exemption Costs and Fees ($0 if no state registrations): $0 - $18,000
TOTAL: $28,500 - $131,000
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We encourage you to call the office, or submit an email inquiry to speak with a member of the EntrePartner team.
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Staying Out of Trouble As a Growing Franchisor
Compliance 101
Becoming a franchisor opens the door to grow your business with a strong, expanding network, but it also brings a new set of legal responsibilities—especially when it comes to ongoing franchise compliance. For early-stage franchisors, the rules can feel overwhelming, but they’re essential to avoid costly mistakes down the road. These are some of the common components of a compliance process that we assist our clients in establishing:
Completing your first franchise disclosure document is a massive undertaking - once complete, you will likely be eager to get it into the hands of your prospects. Upon launching your franchise sales process, you will need to manage proper disclosure, tracking, and applicable state regulations.
Proper disclosure rules require specific waiting periods that your prospects must have both the completed FDD in their hands, as well as their specific franchise agreements, prior to signing on the dotted line. The most basic of these rules is that a franchisor must give a prospect the FDD at least 14 days prior to signing of a binding agreement or payment of money in connection with the proposed franchise sale. Franchisees must also have their franchise agreements, with all material terms filled in, at least 7 days prior to signing or paying money to you.
Tip: The 7 and 14 day waiting periods requires FULL days - so you should start your count on the next full day after they receive the FDD or Franchise Agreements from you.
Not all states treat franchising equally. Some states allow you to sell freely as long as you are federally compliant, and some have their own rules - including registration of your FDD. Some states will require a state-specific Franchise Disclosure Document with terms required by that jurisdiction. All of this means that you will need to track where you are engaging in sales activity, ensure you are utilizing an FDD registered in that state, and include any applicable disclosures and documents specific to that state.
Tip: Know where you are engaging with your leads. Even if you’re based in a non-registration state, activity in a registration state triggers those rules.
Tip: Your FDD must be provided in a single, continuous document, in the specific order in which it was put together. No extraneous materials or tools to navigate the document (link hyperlinks) may be included.
We like to remind our clients that there are ongoing update requirements when certain events occur. One of these requirements is predictable - all franchisors are required to make an annual update between 90-120 days after the end of their fiscal year (depending on the applicable state regulations). For most entities with a December 31 fiscal year end, March or April are the target update months.
Best Practice: We work with our clients to strategically target an issuance date based on their existing sales activity and applicable deadlines.
Tip: One of the most time-consuming part of the annual update process is finishing your annual financial statement audit. We recommend kicking that process off 3 months prior to your target issuance date.
A lesser known update requirement is triggered in the event of a ‘material change.’ The definition of a material change can vary by state - but generally includes events that might affect a franchisee's decision to purchase. This can be related to executive team turnover, effects on financial performance, material litigation or fee changes.
Best Practice: We provide our clients with a list of potential events that constitute a material change, in order to trigger a thought to contact us upon certain occurrences.
What franchisors ‘can and can’t’ say in the franchise sales process is a key component to a new franchisor’s successful growth. Creating disclosure issues in the sales process can have material repercussions later on. Rules prohibit a franchisor from any representation or promise that is contrary to the FDD. Even offhand comments from team members can lead to disclosure issues. Common triggers are any guarantees of results, promises of success, promises of future operational support, and unit-level performance that is contrary to your FDD. Refer to our subsection on the sales process for more detail on this hot topic!
Best Practice: We provide ongoing training of your sales team (even if it is just you) - which we view as is essential to ongoing compliance.
Many franchisors choose to implement a system-wide marketing fund - whereby they collect a percentage of sales from their franchisees on a monthly basis that are deposited into a fund created for the benefit of the system. Maintaining this fund comes with some important ongoing compliance requirements. First, clear processes on how you track and manage the fund are important - you would be surprised at how many franchisors have trouble accounting for actual amounts that were collected or spent from the fund. Second, franchisors must disclose how the funds were spent on an annual basis. Make sure you distinguish what constitutes an advertising fund expenditure, and keep clear records to back it up.
While franchisors can set system standards and require franchisees to use certain products or vendors, they generally cannot dictate what prices franchisees charge their end customers. This is because franchisees are considered independent business owners, and price fixing between independent entities can violate federal antitrust laws. Franchisors must work within the applicable restrictions to come up with best practices surrounding their pricing strategy.
Tip: Many franchisors establish maximum and minimum price standards, pricing tiers, and pricing promotional campaigns, to establish some control around pricing considerations.
These are just a sample of ongoing compliance issues that we work with our clients to ensure that they are covered on an ongoing basis. When in doubt, give us a call so we can provide recommendations on best practices.
MAINTAINING A STRONG
VENDOR NETWORK
As an emerging franchisor, your vendor network is one of your most critical—and often overlooked—assets. The right vendors can help you scale smoothly and keep franchisees happy. The wrong ones can drag your system down, spark complaints, or even expose you to liability. These are some of the common legal and operational considerations that we often assist our clients in managing:
Franchisors are subject to antitrust laws when it comes to their vendor network, and one of the key considerations under this legal regime is establishing the vendors that franchisees can be required to use within the system.
Tip: While requiring vendors bears some scrutiny, franchisors may always establish specifications for products and services that are used within the brand - especially when quality, safety, or brand integrity is at stake.
Franchisors can always set specifications - but requiring the use of a specific vendor must pass scrutiny. Most franchisors create a system vendor list that includes three tiers of vendors: required, preferred, and approved. In order for a vendor to be required, the services or product that vendor provides must meet certain criteria to establish that it cannot be obtained elsewhere from a brand consistency standpoint. Preferred vendors are those that have been vetted to meet the franchisor’s requirements and specifications - and multiple vendors may exist in this category. Approved categories are some of the smaller items that can be purchased from local or multiple sources as long as specifications are met.
Tip: We recommend that our client come up with objective standards around their vendor qualification process - including their ability to scale, meet fulfillment timelines, communicate effectively, work in the regions in which the system exists, and otherwise provide quality products and services.
Our recommendation is that every material vendor relationship should be governed by a written agreement with the franchisor. Many times, this agreement will look differently than a standard services agreement. Instead, the franchisor will be designating and authorizing the vendor to work with the franchise system, setting key timelines, potentially authorizing the use of its confidential information and logos, and other important legal restrictions. The franchisor may also negotiate advantageous pricing on behalf of the system within this agreement.
Best Practice: We work with our clients to create a form designated vendor agreement that they can adapt to each vendor relationship - as well as a process to review the agreement that the vendor utilizes within the network.
One of the often touted benefits of a franchise system is the ability to scale purchasing power with a larger system. Many vendors will be willing to provide preferred pricing based on planned future growth of the franchise system. As mentioned above, franchisors often will negotiate system-wide pricing that is advantageous to their franchisees, as a benefit to being part of the franchise system. Franchisors also commonly negotiate “rebates” or other incentives from approved vendors as part of the relationship. Legally, this type of provision is permissible, subject to certain restrictions. First, franchisors must provide full and transparent disclosure of these rebate relationships in its Franchise Disclosure Document. Second, franchisors must ensure that negotiation of a rebate doesn’t increase the price that franchisees must pay, beyond that of where they could obtain the item with the same specifications elsewhere.
Best Practice: We work with our clients to review their practices and existing vendor agreements to ensure all required disclosures are properly made.
Tip: Some franchisors choose to structure a system whereby any rebate or incentive revenue is used on behalf of the system - such as contributing these amounts to their national advertising fund.
Vendors can often be an extension of the franchisor - and can often reflect on the franchisor and its business practices, as well as serve as a key source of information to the franchisor as to what franchisees are experiencing in the field. We recommend establishing key personnel that maintain the vendor relationships, consistent communication processes, and ensuring that franchisees are updated on a regular basis as to changes to the vendor list.
Best Practice: Ensuring clear separation between the legal responsibilities of the franchisor and the vendor is important to ensure liability protection. We work with our clients to establish systems to ensure it is not inadvertently making itself responsible for the liabilities of its vendors.
WHAT YOU CAN (AND CAN'T) DO WHEN
TALKING TO PROSPECTS
Before you dive headfirst into conversations with potential franchisees, it's crucial to understand the rules about HOW and WHEN you can disclose your franchise offering, along with what your teams can and can't say to prospects before they join the system.
Franchisors are generally restricted from advertising in franchise registration states unless they have registered to sell franchises in that state. Many of these states also require franchise advertisements to be filed before they are used, and some have substantive requirements that must be included on the advertisement itself. For example, Minnesota requires a franchisor’s franchise registration number to be included on advertising copy. New York has a specific legend that must be placed on all advertisements.
The content of franchise prospect advertising should be carefully reviewed, both to comply with state requirements, and also to ensure none of the content is misleading or runs afoul of other regulations. No advertisements for franchise prospects should make reference to the acquiring of a franchise as a safe investment or as free from loss, default, failure, or that a default or failure is impossible or unlikely.
Tip: We always recommend to avoid using the word ‘success’ in any franchise advertisements as it tends to be a trigger for regulatory review!
Best Practice: We always recommend that clients provide us with drafts of their proposed franchisee advertising materials to ensure requirements are met.
One of the most scrutinized areas of franchise laws surroundings financial performance representations. Franchisors have an option to make a disclosure surrounding financial results of one or more franchised units within their system. Making this disclosure is optional. If your FDD includes an Item 19 (Financial Performance Representation), you can speak about the numbers you've disclosed — but only within the parameters laid out in that section. If your FDD doesn’t include an Item 19, you can’t discuss sales, profits, or projections at all.
What is a financial performance representation? An FPR is any statement, in any medium, that gives actual or projected financial results — including:
- Revenue
- Costs
- Profit margins
- Gross or net income
- Unit-level economics
- Break-even points
And it doesn’t have to be in writing. Even a verbal comment like “our average location does $700k in sales” is considered an FPR — and it’s illegal to say unless it’s disclosed properly in Item 19.
❌ YOU CAN'T make any financial performance representations outside of Item 19 — not in your sales calls, not in your brochures, not at discovery day.
❌ YOU CAN'T “wing it” with anecdotal success stories unless they match what’s in your FDD.
❌ YOU CAN'T use FPRs selectively — what’s disclosed in Item 19 must be made available to all prospects.
Best Practice: We work with our clients to carefully craft any Item 19 disclosure in their Franchise Disclosure Documents, and provide talking points around what is included. If a client does not have an Item 19 disclosure, we provide talking points accordingly.
Tip: Financial performance representations can come from any of your team members - ongoing training is key!
Once your FDD is complete, you’re officially open for franchise conversations — but with that comes responsibility. Treat your FDD as a compliance guide and a sales tool. It’s there to protect both you and your future franchisees. Every representation made during the sales process — whether it’s in an email, on a discovery call, or through your website — should not conflict with what is actually in your FDD.
Consistency with your FDD isn’t just about avoiding legal risk (though that’s a big part of it). It’s also about building trust. Franchisees are making a significant investment based on what you say, what you show, and what you put in writing. If there’s a disconnect between your pitch and your paperwork, it can erode confidence before the ink is even dry.
A few tips to stay on track:
- Make sure your sales team is trained on what the FDD says and what they can’t say.
- Avoid offering “side deals” or verbal promises that contradict the FDD.
- If your business evolves, update your FDD accordingly before changing how you sell the franchise.
Bottom line: The FDD isn’t something you set and forget. It should be the foundation of every franchise conversation you have. The more aligned your actions are with your disclosures, the smoother your growth — and the stronger your franchise system — will be.
AVOIDING COMMON MISTAKES
AS YOU GROW
Growth is the goal — but it can also be the biggest risk. For emerging franchisors, the early stages of expansion are critical. These first few deals you do, and performance of those franchisees, set the tone for your brand and your franchisee relationships. Moving too fast (or too loosely) can create cracks that are hard to fix later.
Here are some of the most common — and avoidable — mistakes we see early-stage franchisors make:
Just because you can sell franchises doesn’t mean you’re ready to support them. A strong operations manual, onboarding program, and field support structure should be in place before you start awarding units. Otherwise, it is likened to building the plane while you are already flying - it will be hard to catch up and ensure consistency within your system from the start.
Tip: Stress-test your operations manual with your first franchisees. Feedback is gold - and the opportunity to work out any kinks in the system earlier is a lot easier than trying to gain consistency later.
Your Franchise Disclosure Document (FDD) is the blueprint. If your website, sales team, or brokers are offering a different story than what’s in the FDD, it is ripe to create problems — both legally and operationally.
Tip: Make sure your sales process aligns tightly with your FDD. Everyone on your team - not just franchise development - should be trained on what it says.
Most brands that are ready to start franchising know exactly who their customer is when it comes to their core business. We recommend that franchisors go through the same process when it comes to defining who its franchisees are - viewing them as a customer and stakeholder in your business. This process involves defining objective qualities such as available capital, operational experience, geographical requirements, and evaluating the need to work hands on in the business versus hiring an operator. It also involves evaluating the softer qualities - cultural fit, ethics and ability to follow a system are equally as important. Awarding franchises to underqualified or culturally misaligned operators may get you short-term wins — but long-term headaches down the road.
Tip: Define your ideal franchisee profile early, and stick to it. It is far better to say no than to bring in someone who won’t follow the system or represent the brand well.
Early franchisees are often viewed as taking a larger risk than those entering into an established system - and may in turn request changes to the franchise agreements or other agreements they sign. Staying firm to the core elements of your agreements - fees, royalties, territory assignment, development schedules, etc. - will set the tone for the system. Many times, if a provision is negotiated once - you can expect that other prospects will identifying the negotiated term and it will become the new norm. In addition, certain amendments to your franchise agreement will trigger FDD disclosures in the future.
Of course, a deal must work for everyone, and some prospects may have particular circumstances that require modifications to your core agreements. We suggest working with the prospect to identify and focus on discussing 2-3 “business” issues that are applicable to that particular franchisee.
Tip: Treat every deal like it’s going to be audited. Stick to your processes, keep good records, and update your documents regularly. When you go to sell your system down the road, the buyer will be doing exactly that.
As you grow, the needs of your system will change. Vendors that worked well at five units might not scale to 25. Your initial field support person may be overwhelmed before you realize it. Many franchisors need to bring in infrastructure early to support future units coming online - which can be an investment in the system and the future.
Tip: Reassess your vendor relationships and internal support team on a regular basis, and seek ongoing feedback from your franchise system about what is working and what is not.
FINAL THOUGHT: GROW WITH INTENTION
Sustainable growth in franchising doesn’t happen by accident. It takes planning, discipline, and a willingness to slow down when needed. Avoiding common mistakes early gives you a better shot at building a franchise system that’s both profitable and respected — and that’s the kind of growth that lasts and holds its value.
Let's Connect
We encourage you to call the office, or submit an email inquiry to speak with a member of the EntrePartner team.
Contact Our Office
The use of this form does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.