Once you begin expanding your business by using investors you must be careful that you're not crossing the border into franchise territory. The definition of a franchise is an authorization by a company to a third party enabling them to carry out specified commercial activities, use their trademark, and follow their business model. In exchange for that authorization, the third party compensates the company with fees and royalties. If you are intertwined in a business partnership that meets this criterion, you may accidentally have started franchising your business.
While there are many benefits to franchising your business, an accidental franchise could get you into deep water. If you are providing an investor with a 'license' to use your business model and are requiring training and providing support, then technically you are a franchise. There are legal repercussions to operating like a franchise and you could be subject to hefty fines. Franchisees have rights of their own that could allow them to revoke their contracts, as well as the right to take further legal proceeding. You may even be culpable of a felony, in some states.
If you're concerned that you may be crossing into franchise territory and want to make sure you're legally in the clear, follow these simple steps:
If you feel that you have crossed into franchise territory, then you might want to contact your attorney or give us a call. We can provide you with a litmus test to help you assess whether or not you are a franchise.
Colonel Sanders said this, "I could see it wasn't going to be easy. I couldn't give a franchise to any old greasy spoon. And I knew the chicken had to be cooked the way I told them to cook it if it was going to be as popular as it could be."
Obviously, the Colonel figured it out. There are nearly 4500 franchise units in the US.
Yet, should you franchise your business? There two paths to add new locations beyond your existing store. The first is by organically growing where you expand by building new locations using your time, money and energy. The next option is by developing a franchise system. When you franchise your business you sell the rights to use your business name, logo, products/services, trademarks, and business model to an owner-operator, also known as a franchisee. Franchisees use their capital to purchase these rights and build their own storefronts.
There 7 good reasons why many businesses prefer to franchise as a means for growth. The primary reason is the opportunity to expand rapidly without investing a lot of capital. Unit buildouts and grand openings are incurred by the franchisee. And, since the design of the store matches that of your original store, the buildout time is less and so is the expense. Here are some other good reasons why franchising is the best way to grow your business.
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If you are an entrepreneur thinking about expanding your business, then we can help. Not every business can be a franchise. We can help you assess which path is best for you.