Franchising
It has historically been highly profitable. This book has been written with the specific aim of providing advice to business people who are considering franchising as a Do-It-Yourself option. It defines the steps involved and the issues business people must consider before franchising. It examines the setting up of a franchise, marketing, and the laws governing franchise development. It is the proverbial, “yellow brick road to franchising”; a must have for any business person attempting to franchise a business.
Let’s talk about franchising. It requires a good deal of research for a business owner to successfully navigate into the world of franchising.
The first step is to become familiar with federal and state laws concerning franchising and business opportunities. The sale of a business, without including the property on which it is located, is considered either the sale of a franchise, or the sale of a business opportunity. You might say, “Does it matter”? Yes, very much! The laws governing the sale of a “franchise” are different than the laws governing the sale of a “business opportunity”. The whole point for most businesses is to avoid being considered a “business opportunity”. There are very real differences between “business opportunity” and “franchise sale” benefits/risks when taking people’s money, and/or selling them your “system”.
Most attorneys are not even competent to process the 300 plus pages of legalese (legal jargon) required to meet federal guidelines in the creation of the Franchise Disclosure Document, even after extensive study of the legal jargon regarding the Document. Most attorneys in the franchising field make their income by litigating for the benefit of franchisees against franchisors. They are truly no friend to the business owner turned would be franchisor!
A good example of what I mean is found between franchisees and Burger King over a $1 double cheeseburger. The debate, according to a “Miami Herald” article, is whether the franchisor can override franchisees on their right to set price.
Burger King Franchisees have argued that the company only has the right to recommend pricing and it is the independent franchisees that set their own prices. Franchisees had twice voted down the $1 double cheeseburger before Burger King insisted on introducing it nationally.
The suit, which seeks class-action status, came after Burger King started requiring all franchisees to sell the double cheeseburger for $1. They claimed the item was costing them money, dragging down the average check and restaurant profitability.
The “Miami Herald” article went on to explain, that as of April 12, 2010, Burger King allowed franchisees to raise the price of the double cheeseburger to as high as $1.29. Burger King’s attorney also argued…that the National Franchise Association does not have the standing to bring a class-action lawsuit against the Miami-Dade fast-food chain. The attorney said the case would require individual franchisees to demonstrate they incurred losses selling the $1 double cheeseburger. Burger King’s fixed costs on the product give a profit margin of about 40 percent, he said. The franchisees’ attorney argued that franchisees were concerned they would get “retaliated” against by Burger King for testifying as individuals. Should franchisor Burger King Holdings win, franchisors everywhere may feel free to set prices below franchisees’ costs that impact their independent business’ profits.
The “Miami Herald” article concluded that franchisees historically have retained the ability to set their own prices, allowing this practice to help offset the franchisee’s food costs. This practice offsets the franchisors royalties on top-line sales, helping the store’s bottom-line profits.
The article speculated that if there is absolute control over product pricing, one wonders if the entity is in reality a franchise. On the other hand, is the franchise in fact simply acting as a de-facto employee?
Now to my point, it requires a good deal of research, and the appropriate forms for a business owner to successfully become a Franchisor. That is why I have undertaken to author this book. This book will help you avoid the pitfalls of franchising. In this book we will examine franchising, and the forms necessary to complete your odyssey into the world of franchising.
It is necessary to comply with all of the laws concerning franchising, for if the law is not complied with, then all monies are refundable to the buyer, even after years of operating your “business system”. You are wide open to be sued, and you will pay, even if you prevail. Should a buyer of your “business system”, say that they have lost money operating your “system” (your business plan), then you will most likely pay for their losses for years.
If you take someone’s money in a registration state, you could even face criminal charges, and most likely will, or at least face charges for not complying with the state’s business opportunity law, in which you did or are doing business.
According to Entrepreneur.com, not every state with a business opportunity law defines the term in the same manner.
However, in its simplest terms, a business opportunity is a packaged business investment that allows the buyer to begin a business. Technically, all franchises are business opportunities, but not all business opportunities are franchises.
There can be great implications and impacts upon your business and yourself, depending on how a court, or state regulator might view the sale of your, business system, business plan, or business idea. You say, “I am a franchise”, but a court could possibly legally define you as a “business opportunity”, or as a, “franchise”, or just a franchise that doesn’t comply with Federal Trade Commission rules. There are far reaching implications depending upon how a court or state regulator might rule on your business opportunity.
Now, you might ask how can I create a franchise and avoid the pitfalls of creating and maintaining a legal franchise?
1. Sell real estate with your transaction, in other words, sell the business system with real estate. A business person can sell any number of businesses along with real estate. The transaction, by mere fact that it includes real estate, can avoid the classification of a business opportunity.
2. Comply with your state’s business opportunity laws, but get ready to spend money, have excessive restrictions, and be open for lawsuits the rest of the time you’re in business.
3- Take no deposits, intent money, applications, and never offer a business, or business system for sale.
4-Become a franchise.
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