Denver Colorado Franchise Attorney Martin A. Mansfield, Jr.

Creating Franchise Systems and Selling Franchises

Overview:

If you have a business that can be turned into a standardized business format and then replicated in different territories, you probably have a franchisable business.  You, the franchisor, would sell to franchisees in the different locales who would run the franchised business as their own local operation.  The franchisor-franchisee relationship is expressed in a Franchise Agreement that binds both parties.  The details of running the franchise are set forth by the franchisor in what is known as a Confidential Operating Manual.  Before you can sell any franchises, you must provide potential buyers a [Uniform] Franchise Disclosure Document (UFDD or FDD) mandated throughout the U.S. by the Federal Trade Commission (FTC) and required by many individual states.  Representation by an attorney experienced in franchise law is essential to the franchisor, because compliance with franchise laws is intricate and failure to comply even on technical matters will negatively impact your ability as the franchisor to continue offering and selling franchises.   

Your Prototype:

Every franchise needs a solid foundation.  The primary foundation is the business format that is licensed to franchisees.  Typically this format is an actual operating business that has flourished for the potential franchisor for some time and proven itself by its own track record.  I call this format the franchise prototype.  Hopefully the prototype is observably successful to any outsider, because in the initial franchise development stage the prototype is the primary operation by which prospective franchisees can evaluate the value of the franchised business.  The better developed the prototype the more easily a franchise system can be launched and grown.

Franchise systems are almost always identified by a distinctive trademark.  If you are already using a trademark when you first meet with me, I will evaluate the trademark to see if all is in order from the franchising standpoint.  If you do not have a trademark, then I will assist you to create one.  Ideally we will obtain federal registration for your trademark if it does not have that status when we first meet.

Your Replication Formula and Training:

The entrepreneur with a successful prototype and solid experience running it needs to then be able to package it for others to run.  This is easier said than done.  You know without even thinking how most of the important aspects of your prototype run.  What you must now do is rethink all these aspects so as to be able to train capable franchisees to replicate the format and operations of your prototype at their own location.  You will also have to devise methods for ongoing contact with franchisees.

Working with your Franchise Attorney:

A relationship as complicated as the franchise relationship must be properly defined and established in written documentation binding on all parties involved.  And, the legally required disclosures must also be completely and properly put into documented form.  Having been an active franchise attorney since 1988, I will give you the quality of representation you need to accomplish these goals.   

Your Franchising Business Entity:

One of the first things we must decide is if you should form a separate legal entity for your franchising business as distinguished from your prototype business.  If the answer here is yes, then we must determine the optimal business format.  

Your Franchise Agreement:

The franchise agreement is the cornerstone of every franchise relationship.  It sets forth the dimensions of the franchise license, establishes the financial obligations, provides for the time period of the initial franchise license and renewals of the franchise agreement, lists each parties' obligations, describes the Confidential Operating Manual, protects the confidentiality and proprietary items (including the trademark) of the franchisor, specifies what can cause a termination and what the consequences are, lays out the procedure and requirements for a sale of the franchisee's franchise as well as of the franchise system itself by the franchisor, and many other critical matters.  Franchise agreements contain so many needed topics that they are always quite lengthy and technical.  Once an agreement is signed by a given franchisee, neither party can force a change to it due to changing circumstances, so we will have to work closely to look down the road of the franchise system growth and anticipate problems that might have to be solved by reference to the franchise agreement.  We also have to make sure that the franchise agreement is fair to both sides, creates a "win-win" relationship, and does not read in a fashion that discourages suitable prospects from signing.

We may have additional agreements related to the franchise agreement itself.  For example, we will typically require all persons involved in buying the franchise to personally guaranty and accept the franchise agreement even if the franchise is purchased by them in corporate or some other entity form.  We will also have all employees of the franchisee (and your own employees) sign a legally enforceable confidentiality agreement.  We may want to allow regional developers to put up or sell multiple units and prepare a regional development agreement.

Although the FTC does not regulate the contents of the franchise agreement, certain states do.  In some cases we may draft all versions of the franchise agreement to comply with all state laws and in other cases we will vary the agreement to comply with a particular state's law to be used in that state only.