Franchising: Key Concepts and Considerations
What is Franchising?
A method for the distribution of goods or services.
Elements of a Franchise
License of a Trademark ;
Payment of an Initial Fee;
Franchisor provides substantial support or marketing
plan or the existence of a “Community of Interest”
between Franchisor and Franchisee.
Quick Franchise Facts
Approximately 760,000 Franchised Businesses in U.S.
19 Million Americans employed in Franchised
Businesses.
Over 75 industries represented.
Restaurants are the largest single sector represented.
Regulation of Franchising
The Offer and Sale of Franchises is Regulated by Federal
and State law.
Franchise Disclosure Document “FDD” must be
provided to prospects at least 14 days before the
Franchise Agreement can be signed and money
accepted.
14 states require registration of the FDD.
Without a Federally Registered Trademark, must
comply with state Business Opportunity Laws.
Is Your Restaurant a Good Candidate for
Expansion Through Franchising?
Can the concept be duplicated?
Are there regional taste factors to
consider? Will it sell everywhere?
Is the concept teachable?
Is Your Restaurant a Good Candidate for
Expansion Through Franchising?
Is there an element of uniqueness?
Do you have sufficient proof of concept?
Multiple locations?
Operating history?
Will the business provide a good ROI?
Franchising vs. Owner Expansion
Financial Considerations
Franchising
Franchisee provides capital for expansion.
Can enable more rapid expansion.
Franchisor incurs costs of developing infrastructure to
support franchisees, i.e. marketing, franchisee support
staff, training.
Franchising vs. Owner Expansion
Financial Considerations
Expansion of the brand by Owner will always be limited
by ability to finance growth.
Developing a franchise system involves costs of
consultants and attorneys.
Franchising vs. Expansion by Owner
Regulatory Issues
Franchisee has burden of
compliance with local
laws and tax compliance.
Franchisee has burden of
compliance with HR and
other employment
issues.
Franchisor must comply
with detailed Federal
and State Franchise laws
and regulations.
Includes disclosure of
Franchisor’s audited
financial statements and
other information.
Franchising vs. Expansion by Owner
Financial Rewards
Franchisee pays Initial
Fee from $25K - $50K
Franchisees typically pay
a royalty based on
GROSS REVENUE.
Average range 5 – 7%
Franchisors give up
larger portion of profit,
but have less downside
risk from operational
problems.
Franchisors may not
realize profit for several
years.
Franchising vs. Owner Expansion
Other Considerations
Franchisee has better knowledge of local market.
Franchisee has “skin in the game”
and more highly motivated than an
employee
Franchising vs. Owner Expansion
Other Considerations
Franchisor loses a certain amount of control.
Franchisor can control ultimate product
or service.
Cannot micro-manage.
Joint employee exposure – NLRB.
Difficult to find good franchisees.
Start-up franchises may be difficult to sell.
Issues Specific to Restaurant
Franchises
Heavy Franchisee Reliance on Franchisor
Menu Development and Changes.
Sourcing of Product.
Proprietary Ingredients and Recipes.
Issues Specific to Restaurant
Franchises
Choosing your Franchisees
Brick and Mortar, Food Truck, Alternate Venues?
Do You Really Want to Be a Franchisor?
Running a franchise system is a different business.
Legal compliance.
Must establish System Standards in an Operations
Manual – the “How-To” Guide for the Franchisees.
Do You Really Want to be a Franchisor?
Must build an infrastructure to support franchisees.
Branding and internet presence.
Cost of attorneys and consultants could easily exceed
$150,000. Return on investment may be slow.
Other Options
Joint Ventures: Not a franchise but typical partnership
problems can arise, i.e. division of responsibilities,
disengagement, etc.
Licensing – Can be done on a “One-Off” basis, but may
be deemed a franchise or Business Opportunity under
state law.
Franchising is a method of distributing goods or services where a franchisee licenses a trademark, pays an initial fee, and receives support from the franchisor. Regulations govern the offer and sale of franchises, requiring disclosure documents and trademark compliance. Assessing your restaurant's potential for franchising involves evaluating uniqueness, proof of concept, expansion history, and ROI. Financially, franchising enables rapid expansion with capital from franchisees, while owner expansion faces limitations in financing growth and involves consultant and attorney costs.
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Presentation Transcript
Joseph J. Gottlieb Stout Kaiser Matteson Peake & Hendrick, LLC jgottlieb@stoutkaiser.com 678-775-3545
What is Franchising? A method for the distribution of goods or services. Elements of a Franchise License of a Trademark ; Payment of an Initial Fee; Franchisor provides substantial support or marketing plan or the existence of a Community of Interest between Franchisor and Franchisee.
Quick Franchise Facts Approximately 760,000 Franchised Businesses in U.S. 19 Million Americans employed in Franchised Businesses. Over 75 industries represented. Restaurants are the largest single sector represented.
Regulation of Franchising The Offer and Sale of Franchises is Regulated by Federal and State law. Franchise Disclosure Document FDD must be provided to prospects at least 14 days before the Franchise Agreement can be signed and money accepted. 14 states require registration of the FDD. Without a Federally Registered Trademark, must comply with state Business Opportunity Laws.
Is Your Restaurant a Good Candidate for Expansion Through Franchising? Can the concept be duplicated? Are there regional taste factors to consider? Will it sell everywhere? Is the concept teachable?
Is Your Restaurant a Good Candidate for Expansion Through Franchising? Is there an element of uniqueness? Do you have sufficient proof of concept? Multiple locations? Operating history? Will the business provide a good ROI?
Franchising vs. Owner Expansion Financial Considerations Franchising Franchisee provides capital for expansion. Can enable more rapid expansion. Franchisor incurs costs of developing infrastructure to support franchisees, i.e. marketing, franchisee support staff, training.
Franchising vs. Owner Expansion Financial Considerations Expansion of the brand by Owner will always be limited by ability to finance growth. Developing a franchise system involves costs of consultants and attorneys.
Franchising vs. Expansion by Owner Regulatory Issues Franchisee has burden of compliance with local laws and tax compliance. Franchisee has burden of compliance with HR and other employment issues. Franchisor must comply with detailed Federal and State Franchise laws and regulations. Includes disclosure of Franchisor s audited financial statements and other information.
Franchising vs. Expansion by Owner Financial Rewards Franchisee pays Initial Fee from $25K - $50K Franchisees typically pay a royalty based on GROSS REVENUE. Average range 5 7% Franchisors give up larger portion of profit, but have less downside risk from operational problems. Franchisors may not realize profit for several years.
Franchising vs. Owner Expansion Other Considerations Franchisee has better knowledge of local market. Franchisee has skin in the game and more highly motivated than an employee
Franchising vs. Owner Expansion Other Considerations Franchisor loses a certain amount of control. Franchisor can control ultimate product or service. Cannot micro-manage. Joint employee exposure NLRB. Difficult to find good franchisees. Start-up franchises may be difficult to sell.
Issues Specific to Restaurant Franchises Heavy Franchisee Reliance on Franchisor Menu Development and Changes. Sourcing of Product. Proprietary Ingredients and Recipes.
Issues Specific to Restaurant Franchises Choosing your Franchisees Brick and Mortar, Food Truck, Alternate Venues?
Do You Really Want to Be a Franchisor? Running a franchise system is a different business. Legal compliance. Must establish System Standards in an Operations Manual the How-To Guide for the Franchisees.
Do You Really Want to be a Franchisor? Must build an infrastructure to support franchisees. Branding and internet presence. Cost of attorneys and consultants could easily exceed $150,000. Return on investment may be slow.
Other Options Joint Ventures: Not a franchise but typical partnership problems can arise, i.e. division of responsibilities, disengagement, etc. Licensing Can be done on a One-Off basis, but may be deemed a franchise or Business Opportunity under state law.
