CREATING A FRANCHISE
An Article by William A. Taylor (The Business Lawyer)
You have a business; it’s making money. You think you can increase your personal wealth by opening new stores. But, you would like to shift the management of the new stores to someone else. Franchising becomes an option.
In franchising you can receive a royalty from the sales without the headaches of actually running the business. How do you do it?
The state of California regulates the offer and sale of franchises as well as the relationship between the franchise seller (franchisor) and the franchise purchaser (franchisee).
The first question is: What is a franchise? A franchise is a relationship between the franchisor and the franchisee that has three characteristics: a trademark, a marketing plan and a franchise fee. If any of the three are missing, a franchise does not exist.
Trademark If a good portion of your success has been absorbed in the name of your business, it would be wise to trademark that name so that the name, itself, will have a tangible value. (One is reminded of Famous Amos Cookies, where Famous Amos did not own the rights to the name “Famous Amos” and when the investors who did own the rights to that name decided to go elsewhere, Famous Amos got no money, even though they were using his name.)
Most business owners spend their careers building up the goodwill of their business in their name so that the public quickly and frequently identifies their company with the product or service being sold. Trademarking the rights to that name will allow rights to use it to be sold as part of a franchise opportunity.
Marketing Plan Your way of doing things, such as distributing the goods or the services, has proved to you to be a most efficient money-earner. You think everyone should be like you. By offering some kind of plan to guide the purchaser of your franchise and by giving that purchaser assistance in mastering “your way,” you will have developed a marketing plan. In franchising, you are stating that by doing things your way, the franchisee will make money – and be able to pay you a royalty.
Franchise Fee Payment of an upfront fee and payment of periodic payments over the life of the business relationship is the mark of a franchise fee, as long as those payments are not payments for the goods or services that are being sold to the general public.
The franchise fee is your method of determining the value of the success of your business. If no one wants to pay that fee, you will take from that the fact that your business is not worth anything to anyone but yourself.
California regulates not only: a) the creation of franchises, but also b) the relationship between the franchisor and the franchisee. These are two separate matters.
Creation of Franchises The creation of a franchise requires the submission of an offering circular to the Department of Corporations. That offering circular is the document that is given to potential franchisees. It will tell all of the pertinent information of why a person would want one of your franchise opportunities and will also list all of the risks of franchising with you.
The law also requires a ten (10) day cooling off period before the franchisee can sign any agreement or pay any money relating to the franchise opportunity.
The Continuing Relationship between the Franchisor and Franchisee As for governing the relationship between the franchisor and the franchisee, the law’s concern is over the franchisor’s premature termination of the franchise relationship without the consent of the franchisee or outside of the contract. Those issues are covered by California law.
California Laws Both creating a franchise and governing the franchise relationship create legal liability to the Department of Corporations which could amount to a criminal liability in the case of a “willful” violator of the laws.
Violation of the California franchise laws will make the seller of franchises (the franchisor) liable to the franchisee for damages or, if the violation is deemed to be “willful,” the franchisee can rescind the agreement and recover his/her entire investment.
Conclusion Go ahead and franchise. Just make sure you do it right. This law firm would love to be on the other side litigating a case against someone who did not take the law seriously. We could see one of our clients trying out your franchise until growing tired of it, then suing for a return of his/her entire investment – and obtaining it; a no risk trial period if there ever was one.
ABOUT THE AUTHOR: William A. Taylor, attorney at law, does business as “THE BUSINESS LAWYERS.” He can be reached at (510) 893-9465