Should You Franchise Your Family Business?

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Davis Wright Tremaine LLP

Successful businesses want to grow. However, there are many different routes to growth, and choosing the right one can be difficult. The following article discusses one such strategy: franchising.

What Does It Mean to Franchise Your Business?

Simply put, franchising your business means allowing someone else to use your products, branding, intellectual property, and more to operate a new branch of the business. The franchisor provides name recognition and know-how. Meanwhile, the franchisee provides the franchisor with capital, labor, and ultimately revenue.

Is Your Business Franchisable?

Success

While it may seem obvious, success is perhaps the most important criteria for a business to meet if it is to launch a successful franchise program. In most cases, becoming a franchisee requires a significant investment of an individual's own capital.

It is unlikely that a franchisor will be able to attract quality candidates if potential franchisees do not believe that there is a high chance that their initial investment will lead to profit down the road. Franchising is not a prudent move for businesses that are in a rebuilding or realignment stage.

Brand Protection

Having protectable intellectual property – e.g., a trade name that you have registered, or can register, with the U.S. Patent and Trademark Office, is another important criteria for a successful franchise. Many small businesses start out by choosing a brand name or logo that is overly descriptive or without running a nationwide search to identify prior users of confusing similar names that may limit a business's future expansion opportunities.

Taking steps to register your name, logo and other unique branding materials with the U.S. Patent and Trademark Office and secure the necessary URLs and social media handles is essential homework for every franchisor.

Transferability 

In order for a franchise to be successful, the underlying business model must be teachable and replicable. For instance, restaurants are generally regarded as easy to franchise, in part, because recipes and cooking techniques are relatively simple to teach. On the other hand, a business built around complex, technical knowledge that is cultivated after years of development is much harder to franchise.

Potential Hurdles to Franchising

To become a successful franchisor, one must pivot into the business of selling and servicing franchises. The franchisor's new role is entirely different from the underlying business it is franchising for the primary responsibility of a franchisor is to manage franchisees and lead a competitive brand. If your existing management is not ready to step into this new role or hire talent to take this job on, franchising is not the right option.

Franchising necessarily leads to surrendering control. The franchising model revolves around a third party running the day-to-day operations of a business that someone else built. Franchising is not a good option for people who struggle to acquiesce control.

A franchisor should resist the temptation to award a franchise anywhere in the country simply because someone has expressed interest in becoming a franchisee there. When planning an expansion strategy, a franchisor needs to be able to identify the demographic factors that drive traffic to its business and strategically award franchises for markets where those factors are present.

Conclusion

Turning your business into a franchise has the potential to create significant value and revenue. However, it is a complicated process, and legal counsel is necessary for success. Be sure to work closely with an attorney specializing in franchise law if you want to begin the franchising process on the right foot.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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