The Top 6 Issues New Franchisors Face

Sawan Patel August 1st, 2019

While it can be exhilarating and ultimately enriching to franchise your business and watch new locations open across the country, franchising isn’t all fun and games—and no franchise system is guaranteed to succeed. Plenty of things can go wrong, due to internal and external factors like poorly drafted legal documentation to picking franchisees that don’t find your system or culture. It’s essential for would-be and new franchisors and experienced franchisors alike to be prepared for the pitfalls they may face in the future. We’ve worked with brands big and small on a wide range of franchising issues, and we’ve seen quite a few issues over our 40 years of experience. Here’s a list of some of the most common franchising issues faced by emerging franchisors.

Mistaking Franchising for Licensing

This one extends mostly to aspiring franchisors who aren’t as familiar with franchise law. Franchising is a highly regulated area, and business owners must be careful to ensure they comply with any and all state and federal regulations. Be sure to know the differences and overlaps between franchising and licensing before allowing anyone to use your brand in any way. Here’s what to look out for: if you let someone use your name, charge them a fee, and also provide them with training or support service, or otherwise control critical aspects of their business, you’ve met all the requirements for selling that person a “franchise.”

Even if the relationship is called a license or consulting arrangement, it will still be deemed a franchise under state and federal law. And if you haven’t gone through the proper channels to do this, you’ve just opened yourself to significant civil and criminal liability. Before you can sell a franchise, you must provide a Franchise Disclosure Document (FDD) and a copy of the Franchise Agreement to the prospective buyer. Some states require the franchise offering be registered with the state first.

Insufficient Funding

While your franchisees will pay you an initial franchise fee as well as ongoing royalties and marketing fees, you’ll still need to come up with sufficient capital to fund everything you need to build a solid franchise system. That includes drafting necessary documents like the FDD and Franchise Agreement as well as creating an Operations Manual that franchisees will use to operate their locations, not to mention additional accounting, marketing, and administrative needs. If you don’t have enough funds to see your franchise to the point where it begins making you money, you won’t get very far in your franchise journey.

Franchising a brand is not cheap. While it usually costs less to franchise a business than opening additional locations yourself, franchising still requires sufficient capital to meet legal and business prerequisites. Contact Larkin Hoffman for a quote on our franchise legal services.

Inadequate Legal Documents

Aspiring franchisors don’t just need an FDD and Franchise Agreement; they need a whole host of ancillary documents to document the franchise offering. Some new franchisors make the mistake of springing for the cheapest legal services they can find, and they certainly get what they pay for: a cookie-cutter FDD and little or no guidance on key legal issues. However, in our experience, no two businesses are alike (and if they are, they may not be strong candidates for franchising). Therefore, no two FDDs can be alike either, as the FDD describes various aspects of the franchisor and the franchise system, from the management team, fees, startup costs, use of suppliers, and trademarks.

You need documents tailored to fit the unique requirements of your business, as well as legal advice as state and federal regulations evolve. Our attorneys will have your back through the entire franchising process and beyond.

Hiring the Wrong Franchisees

We’ve provided tips for choosing the right franchisee before, but it’s ultimately up to the franchisor to make those decisions and hire the ideal candidates. It’s particularly important to select the best franchisees for your system and culture when you’re first getting your franchise system up and running. After all, you’ll need these first few to be successful in order to prove that operating a franchised location of your business is lucrative and something that people will want to do.

Improper Terminations

Unfortunately, not every franchisee will work out, and you may find yourself needing to terminate a Franchise Agreement. This must be done carefully and in accordance with all applicable state laws. Depending on the franchisee’s state of residence, the location of the franchise, and the franchisor’s state, multiple state laws may apply! On top of that complexity, the franchisor must comply with the notice and cure periods as stated in the Franchise Agreement, or he or she may be faced with wrongful termination claims. You should have a knowledgeable legal team on your side in order to navigate these tricky situations. Our attorneys have significant experience navigating these allegations and enforcing post-termination obligations.

Stepping Back

There is such a thing as being too attentive. The switch from running a business and operating one or a few locations to operating a franchise and selling to prospective franchisees can be a tough one. Franchisors must learn to strike the proper balance between supporting their franchisees and allowing them to maintain some level of independence. This healthy balance will look different for every franchised business, depending on the industry and the distribution of franchised locations.

It can be extremely challenging to take a step back from the daily operations of your franchised locations, particularly if you’ve been deeply involved in getting them set up. But you’ll find that some measure of distance allows everyone to relax and leaves you to focus on further expanding your successful business by selling more franchises.

The Legal Counsel You Need, When and Where You Need It

At Larkin Hoffman, we provide a range of legal services to franchisors and startup entrepreneurs alike. While we represent some of the biggest brands in a variety of industries, we also work with aspiring franchisors who are just getting into the franchising business. Whether you’re opening your 100th location or still determining if you should franchise your business, we can help. Contact us today to set up a complimentary consultation.