Franchising a business can be an excellent way to expand your brand. When you franchise a company, you allow others to use your existing name, trademarks, and business techniques to build their franchise locations. This will enable others to profit by building on your success while also growing your brand at the same time. If you are interested in this growth path and want to know more about how to franchise your business, a Denver business attorney may be able to guide you through this complicated but fruitful process.
What Does It Mean to Franchise a Business?
When you turn your business into a franchise, you are making a contract with others that permits them to use your business model for one or more locations. The franchisee operates a new location that displays your brand. The franchisee has limited rights to use your brand’s intellectual property, supply chain, and any systems inherent to your business model. They also typically have the right to operate multiple locations.
Franchising vs. Licensing: What’s the Difference?
Franchising and licensing are significantly different concepts:
- Franchise Agreement: the franchisee has the right to create a new location and use the purchased brand aspects to run that location in a way that reflects the success of the brand owner.
- License Agreement: the licensee purchases access to specific intellectual property that may only be used for a specific period or specific product.
Both let you share aspects of your brand for a fee. But they differ in how much control the purchaser has over what they purchased.
Why Franchise Your Business?
The main reason that people franchise their business is to grow it. When you franchise your business, you allow others to operate locations that display your brand and follow your brand processes. This would increase brand awareness at a much faster rate than you could if you tried to run all of your locations on your own.
Although others are operating these locations, you still make money from them. Franchisees pay you a fee to be allowed to use your systems and branding. Effectively, you are being paid by people who are advertising your brand and products.
Pros and Cons of Franchising a Business
The decision to turn a business into a franchise is not one that you should make lightly. Consider the pros and cons carefully before speaking to a franchise lawyer.
Franchising offers numerous advantages that can potentially make it valuable:
- Rapid Market Expansion: the franchisee provides most of the capital, labor, and time investment when creating a new franchise location. This lets you expand quicker than you could on your own.
- Royalties: not only is it cheaper to start a franchise location, but you also receive regular income in the form of royalties tied to the gross profit of each unit.
- Increased Brand Awareness: every new location increases the reach of your brand, both due to the physical location and the advertising purchased by the franchisee.
- Franchise Improvements: new franchisees often introduce new ideas. When these ideas prove fruitful, they can be implemented by every location in your franchise, increasing the overall value of your brand and system.
If these benefits look good, you should speak to an attorney about franchising.
Unfortunately, franchising isn’t without disadvantages:
- Failures Compound: if a franchise location fails, that failure can have a domino effect on your brand. Others are less likely to franchise with you after a failure, and some franchisees may decide to end their contract
- Early Profits May Not Exceed Costs: since you only receive royalties rather than all profits, early profits might be quite low. You should be prepared to potentially lose money at first from new franchise locations
- Spreading to New States Can Be Expensive: if you expand to a new state, franchise attorney fees and legal costs are likely to be quite high
You will need to weigh whether these disadvantages outweigh the previously discussed advantages.
Is Your Business Franchisable?
Not every business can be built into a successful franchise. Typically, franchisable businesses provide a service, like McDonald’s or Everline Coatings. But just because your business successfully provides a service, that doesn’t mean that others will duplicate your success. Franchisable businesses usually share these traits:
- A System that Is Easy to Learn: if the new franchisee and their staff can’t easily learn and implement your system, they may never be able to duplicate it properly.
- A Business Model that Can Weather Hardship: most franchises serve food for a reason. People can’t live without food. If your business model provides a service that is necessary even when times are tough, it is probably franchisable.
- You’ve Received Requests to Franchise: the best sign that your brand is franchisable is if you’ve received multiple requests from others to become a franchisee.
- Costs Are Reasonable: typically, the entry cost to franchising is much lower than the entry cost to creating a business from scratch. If your business requires massive startup costs, it won’t appeal to most people looking to become a franchisee.
- You Are Consistently Profitable: if your business is barely staying above water, it is unlikely that a franchise location will do any better. Until all of your locations are consistently profitable, you shouldn’t consider turning your brand into a franchise.
This isn’t a definitive list, but if none of these traits apply to your business, your business probably isn’t ready to be a franchise.
How to Turn Your Business into a Franchise in 8 Steps
Nobody is born knowing how to franchise a business, but the process is easier than it seems. Assuming you already own a successful business, you just need to hire an experienced franchise lawyer who will guide you through the steps.
There is a significant investment cost to get started, and it may take some time before you get a return on your investment. But with a little patience, it can be a valuable decision.
1. Protect Your Business's Intellectual Property
Typically, one of the main reasons that people are interested in becoming a franchisee is because you have valuable intellectual property. McDonald’s food has a distinctive taste, and kids are drawn to the branding of the Happy Meal. A franchisee is paying for the recipe of this food and has the right to use this branding because they believe it has value.
Your intellectual property may also have similar value, but only if you protect it. Protecting your IP is the first step of how to build a franchise.
2. Register Trademarks
Before you can even think about licensing your trademarks to a franchisee, you need to register those trademarks with state and federal authorities. If you haven’t previously registered a trademark, you don’t have the legal right to prevent another entity from using them in the same way. Even worse, if someone else registers before you, you may lose access to your trademarks.
A franchisee won’t be interested in using a company's logos, name, or slogan that can’t defend that intellectual property. There is nothing to stop competitors from using those trademarks and diluting the value of the brand.
3. Prepare and Issue Your Franchise Disclosure Document
If you are wondering what does a franchise lawyer do and why hire a franchise attorney, the franchise disclosure document (FDD) is a big part of both answers. Every business that becomes a franchise must create an FDD that meets Federal Trade Commission (FTC) regulations.
The FDD for your business must comply with state and federal laws, which are quite extensive. The FTC requires 23 disclosure items covering nearly every aspect of you, your business, and the franchise contract you intend to create.
Any small mistake could create legal problems. And even if it is prepared perfectly, you will need to update the FDD annually, both with the federal government and with certain states where you sell your franchises. An experienced franchise lawyer will ascertain you don’t make mistakes and meet every deadline.
Once you have a valid FDD, you are required to disclose it to potential franchisees at least 14 days before they sign your franchise agreement.
4. Draft a Franchise Agreement
Another important task for your franchise attorney is to help you draft a franchise agreement. This contract must align with the answers you provided in your FDD, and every signed contract will become a part of your FDD.
Your franchise agreement spells out the terms that both parties must follow and usually includes:
- Franchise fees and royalties
- Conditions for renewing or terminating the agreement
- Post-termination conditions, including non-compete agreements
- Territory boundaries for the franchise location
- Sales and growth expectations
- Inventory and equipment specifications
- Dispute resolution guidelines
Your franchise attorney will help you work out the specifics that are best for your brand, and individual contracts may differ depending on circumstances. The important thing is to have a good template.
5. Prepare Your Operations Manual for Franchisees
Unless you want to hold the hand of every franchisee while they are building their location, you will need an operations manual. This manual will describe your brand systems and franchise requirements in detail. It is also a step-by-step guide to building a new location. Your operations manual should typically include:
- A vision for your brand
- Goals that each franchise location should meet
- Minimum service and product requirements
- Contact information for suppliers
- Operations standards
- Marketing guidelines
Traditionally these manuals were in book form, but you might want to use other media to make them more accessible in the digital world.
6. Establish Your Franchise Company
Before you build your franchise, you will create a separate company from your already successful business. This company exists only to sell franchises and help franchise locations prosper. By separating the franchise company from your original business, both entities are protected in case the other one fails.
Additionally, creating a new company makes the bureaucracy surrounding franchising easier. Your new company has almost no financial history, which means there are almost no records for the company. This will speed up creating and processing your FDD, as well as other legal documents involving your franchise company.
7. Register and File Your FDD
Depending on what states you are selling franchises in, you may be required to file or register your franchise with the state. There are 12 states that require registration and 10 more that require you to fill out the FDD. The 12 that require registration have additional state-level regulations you must file.
Colorado is not a franchise registration state, but that doesn’t mean you can ignore this step just because your franchise company is located in Colorado. If you sell a franchise in any state with filing or registration regulations, you are bound by those rules for that franchise location.
8. Create Your Franchise Sales Strategy and Budget
The final step in how to create a franchise is determining a budget and sales strategy for your newly formed franchise company. Your budget should take into account the following factors:
- Training costs for new franchisees
- Supporting franchisees during the first few months or years
- Advertising, both for the brand and franchise opportunities
- Investing in your sales process
- Improving the products or services your provide
- Creating a story for your brand
Simply selling franchises to franchisees isn’t enough to grow your brand. You need to give it constant attention, particularly during the early years. The success or failure of your first few franchise locations will usually correspond with the success of your brand. Set realistic budget goals and be ready to invest heavily to ensure that early franchisees are successful. This will make a big difference in your long-term success.
How Long Does the Franchise Development Process in Denver Typically Take?
If you are still interested, you probably want to know how long does it take to franchise a business in Denver. Typically, the process takes about three to four months, assuming you aren’t facing any unusual challenges.
How Much Does It Cost to Franchise a Business in Colorado?
The answer to this question is closely tied to the question, “How much does a franchise attorney cost?” During the franchise development stage, the majority of your costs will be attorney fees. And as previously noted, your lawyer will need to spend many hours completing all the paperwork associated with your franchise company.
Once the sales stage begins, you will be spending money, per your budget, and making money at the same time. This makes it difficult to give an exact value, but somewhere between $20,000 and $80,000 is a reasonable estimate.
Grow Your Brand with Sequoia Legal
If you have read this far, you are ready to take the next big step. But that doesn’t mean you have to commit yet. Instead, now is the time to consult with the experienced team of franchise-building attorneys at Sequoia Legal.
Our team will answer any questions you still have and better explain your options, costs, and expected timeline. You lose nothing by learning more, and this just might be the start of a lucrative new chapter in your life. If you are ready to take that step, contact us to schedule an initial consultation at your earliest convenience.