Franchising your restaurant may be the hallmark of a successful and profitable concept. It is, after all, a great way to expand and grow. However, franchising your restaurant is a considerable step and it should not be taken lightly. We recently had the opportunity to sit down with Drew Chalfant of Roda & Chalfant, a franchise law firm out of Cincinnati, Ohio to talk about the high-level, key considerations an operator should consider before taking the leap into franchising
So, Drew, your best friend decides to take his growing quick-serve concept to the next level by franchising, what are your recommendations from a legal standpoint to ensure he gets it right?
While I know this sounds self-serving, I really can’t overstate how important it is to work with someone who has experience inside the franchise industry and has developed brands in the past in some capacity. That can come in the form of a former employee of a franchise company, a third-party consultant or development agent, or a franchise attorney. All too often I have witnessed brands attempting to cut corners or work with an attorney who “knows a little bit about franchising” and the results are disastrous. It’s important to think about what you’re actually doing – which is setting yourself up to have a bunch of contracts out in the world as the most valuable assets of your franchise system. For many operators, that’s what being a franchisor means – having 1 or 2 “corporate” stores, and a file cabinet full of franchise agreements that entitle the franchisor to receive payments from franchisees. By its nature, franchising is a legal exercise and it’s important to get it right from the beginning.
On top of working with a franchise attorney who is dedicated to practicing in space, you also need to start thinking outside of your local area when it comes to your brand’s intellectual property. While it isn’t required to have a federally registered trademark, you will want to have confidence your brand name will qualify for registration. You also want to make sure there aren’t a bunch of other small operators in other markets using a similar or identical name. For many of our first-time franchisor clients, getting a trademark clearance search done, and an application in front of the U.S. Patent and Trademark Office is another first step that happens simultaneously with putting together their franchise system and franchise documents.
What are some of the most common mistakes you have come across as operators franchise a concept?
Failing to properly research and vet their brand name is a big one. You don’t want to set yourself or your future franchisees up for rebranding or trademark disputes down the road.
Another common mistake is thinking you have to have everything figured out and your brand has to look and feel like a Chick-fil-A or a McDonald’s to franchise your business. While you do want to be offering franchisees the chance to buy into a profitable business that has operating procedures defined and written down – you don’t necessarily have to have every detail down to its perfect form in order to franchise. Many franchise systems evolve over the years as they bring in talented franchisee partners who help strengthen the system from within.
Lastly, a very common mistake we see that seems to be prevalent in the restaurant space is thinking you don’t have to comply with franchise laws because you are “licensing” your name/logo and recipes to someone else for a “license fee”. As far as the franchise laws are concerned, it does not matter what you call the agreement. The saying we use in the industry is: “if it walks and quacks like a franchise, it’s a franchise”. In almost all cases, a business is a franchise if it offers others the right to use a common name or trademark, provides support to those businesses in some way (operations, training, marketing, etc.), and requires the payment of a fee (upfront or ongoing). While it’s important to comply with franchise laws in all states, some have particularly nasty state laws and regulations that sit on top of the federal franchise rule. If you sell “accidental franchises” in those states without the proper legal documents, you could be setting yourself up for issues with the state regulators, or you could be attaching a ”get out of jail free card” to each of your “license” agreements. To franchise your business, you are required to have a proper franchise disclosure document (FDD) and agreements – which again I highly recommend be prepared by a franchise attorney, not an attorney who dabbles in franchising.
What is an FDD?
FDD stands for “Franchise Disclosure Document” – though it is sometimes referred to as “Federal Disclosure Document” as well. Your FDD is a pretty unique document in that it is one part compliance obligation, one part sales tool, and it is simultaneously the biggest asset and biggest potential source of liability for your franchise system.
As a compliance obligation, the FDD has to conform to certain rules and a predetermined format. That format requires you to disclose 23 “Items” that are intended to give your prospective franchisees all of the information they need to make a reasonably informed decision on whether or not to buy into your franchise system. This includes things like the ownership and structure of the brand, its executive team, litigation and bankruptcy history, the upfront and ongoing fees that are required, the amount required to invest to get going, what the franchisor does for you and what you have to do as a franchisee, as well as information about the financial performance of franchisees and makeup of the franchisee group overall. There’s quite a bit more to it than that, but it’s a good overview.
As a sales tool, the FDD is also the basis for most of the advertising materials you will create about your franchise offering. When you’re discussing the franchise offering, many of your advertising materials must tie back directly to your FDD, especially when it comes to the financial performance of existing corporate or franchise stores. With that in mind, it’s important to craft your FDD in a way that makes the brand an attractive offering to potential franchise buyers. This goes beyond just the financials and includes things like real estate support, marketing support, operations training, and ongoing operations support that the franchisor will provide.
Your FDD is your biggest asset because it lays out the structure of your franchise system. As you grow, this will help you steer the ship as long as it is set up properly. If you go to sell your brand down the road, the buyer is also going to want to see ALL of your prior year FDDs and franchise agreements to make sure they were done properly and have maximized the value of your franchise system. Getting these things wrong is also why a poorly executed and maintained FDD can be a source of liability for the franchise system.
Why is it important to engage a franchise lawyer? Can you tell me a little bit about Roda Chalfant Franchise Law and the clients with whom you work?
At the risk of sounding redundant – it very much matters that you work with an attorney who knows franchising and practices exclusively in this area. Rules and regulations are constantly changing, as are the trends and players in the franchise industry – a good franchise attorney will have their ear to the ground on these types of things.
Our clients are typically operators with 1-5 stores that are wanting to scale more quickly through franchising. Most of our clients are becoming franchisors for the first time now they have a good handle on operating their current stores. As a result, it’s our goal to not only provide the “what” to do, but also the “why to do it” wherever possible. Educating clients on how to operate as a franchisor is one of the most challenging, but rewarding, aspects of what we do.
Any other advice you would share with a potential franchisor?
Learn. Obtain as much information you can from people who have done it before. If and when you pull the trigger on deciding to franchise your business, make sure you do it with people who see your vision and understand their role in supporting your growth in a secure and intelligent manner. Franchising also involves fairly high dollar figures changing hands during the sales process. As a result of this, there are naturally going to be some sharks in the water. This is all the more reason to work with someone who has your best interest at heart and can help you navigate which “help” you should seek, and which to avoid.
It truly is one of the most unique business models in the world – entrepreneurs turning other people into entrepreneurs and helping them shortcut all of the scrapes and bruises that the original founders of the brand learned along the way. I love what I do and I can’t imagine doing anything else!
Drew Chalfant, Managing Partner & Franchise Attorney
Roda & Chalfant Franchise Law