When you are ready to take a new step with your business, you may be wondering if turning it into a franchise is right for you. Does it help meet your goals, values, and propel you towards further success? Franchising your own business can help you grow by using someone else’s expert knowledge of the local market as well as their capital, but it does mean you will have to give up some operational control as well as require you to take on a federal disclosure obligation.
If you’re unsure whether or not you should franchise, read on to learn about the benefits, legal franchisor requirements in Arizona, and how to start.
Turning your business into a franchise means that you will own the entire franchise system. You are the Franchisor: the business owner who will be licensing your brand and the system you create to others. This article contains information directed specifically towards the Franchisor.
Debating whether to create a franchise is often pitted up against opening another location on your own. This is a legitimate and challenging decision that most owners put much consideration into. Opening another location on your own is often costly with more risk and takes more time than franchising. However, you will maintain all of the control which is attractive to many owners.
On the other hand, once your franchise is set up, opening franchises is often fast and can happen simultaneously. Not only that, but the cost to franchise a business isn’t as significant and comes with less risk as well. Though, you will be giving up a significant amount of control.
One of the most valuable aspects when expanding a business is knowledge of the local market. Many owners often take months of potentially costly demographic research and some guesswork. When you own a franchise system, you can expand into areas like Flagstaff or Tucson using the market knowledge your franchisee already has. The business can experience a high chance of success from the start.
When a franchisee enters your system, they will use their own capital to fund and grow the additional location. This is a significant benefit allowing your business to expand without having to consider your own financial limitations or needing to get an investment.
Business growth is heavily dependent on advertising to bring awareness to the local community about the products or services provided. When you have a franchised business, each new location operates as its own advertising. The larger the footprint of your franchise, the more trust and customer interaction you will have. Franchise systems also tend to have a collective Brand Fund. You can require a percentage of gross sales (typically small) from your franchisees to be put in this fund. This pays for marketing without having to pay the costs out of your own business fund.
Another one of the benefits of franchising your business is the reduction in financial risk and much less interaction with day-to-day HR responsibilities. Your franchisee is the one who takes on the capital risks of their business. The franchisee is the tenant, they are the ones who take on loans to complete store build-outs. Additionally, the franchisee is the direct employer. This means they handle payroll, hiring, firing, and any HR situations.
However, there is a trade-off. While you do not have to deal with the day-to-day of the individual businesses, as the franchise system owner, your responsibilities will include overseeing the franchise as a whole. This oversight includes several different obligations as well as following certain legal requirements.
When you franchise your business in Arizona, you will benefit from recurring revenue from each franchised location in the form of royalties and fees. The royalty amounts can be a percentage of gross revenue, a flat monthly royalty, or a percentage of gross income with set minimums. In order to ensure you are gaining maximum benefit from these fees and royalties, you should ensure a lawyer works with you to draft your Franchise Disclosure Document. The rules in this document will depend heavily on following the laws of the Federal Trade Commission and a lawyer can ensure compliance.
The legal aspect of franchising a business is important and can be complex. You may be wondering, “Should I franchise my business?” It is a big decision with many implications. A lawyer can help you decide if it’s right for you, they can walk you through the steps if you decide to move forward, and they will go through all the legalities with you, ensuring compliance and protection of your business’s best interest.
The franchise disclosure document is required by the Federal Trade Commission for all prospective franchise systems. This document is put together to protect both the franchisee and the franchisor and to give the prospective buyer all the details. It essentially operates as an educational document. There are 23 items on this document that discuss fees, initial investment estimates, trademarks, contracts, and more. The potential buyer will have 14 days to review the FDD.
Putting this document together carefully with the help of a franchise attorney is crucial. It must be specific to your franchise. Errors can lead to costly personal liability and force you to refund franchise fees under FTC rules. The franchise disclosure document requirements are strict and must be handled with precision and knowledge.
The State of Arizona does not require you to register your FTC compliant franchise disclosure document with the state. However, many other states do have this requirement. This means that if you want to expand your franchise out of state, you need to be aware of registration requirements in that specific state and follow these rules.
Part of the franchise disclosure document requirements is the franchise agreement. This agreement is signed as the binding contract once the franchisee decides to commit after the 14 day waiting period. This agreement includes how the business should be operated, how the brand is protected, and what happens when the relationship ends.
From the terms of the franchise agreement to transfer restrictions, to termination triggers, this agreement is one of the most important documents that can act as a line in the sand when there is misuse, underperformance, or any other breach of agreement.
You should consult with a franchise attorney before you franchise your business to talk over protecting your brand. The ideal steps are to trademark your brand first and then start the franchise. This ensures your brand is completely protected and within your control before you move forward.
It may be exciting to consider the possible growth opportunities of owning a franchise system, but there is much more to starting than the cost to franchise a business or the franchise disclosure document. Some signs your business is ready to transition as a franchise include:
For the best chances of success, you should absolutely put together certain systems and documentation before you start up your franchise. Having an operations manual, training program, solid vendor relationships that can scale with you, and a consistent brand will ensure a smooth transition.
Starting a franchise and failing can be devastating and is a significant loss of time and assets. Being aware of how to franchise your business in Arizona and the common pitfalls can help propel you towards success and avoid failure. The pitfalls include:
The costs to franchise a business involves several different aspects and can vary. Generally, you will be paying for an attorney to develop the FDD and draft agreements, trademark registration, financial audits to satisfy item 21 of the FDD, and state registration fees if applicable.
Whether or not you register before you franchise a business depends on which state you are located in. Arizona is a non-registration state, but if you live in Arizona and want to set up a location in another state, you will have to follow that state’s registration guidelines.
You must follow important steps before you franchise your business which can take varying amounts of time. First you will have to determine your strategy, structure, and finances. From there, you should set up a separate legal entity specifically for your franchise operations. Create your operations procedures and training curriculum, hire a CPA for an audit, then work with an attorney to draft an FDD.
Yes! The parameters for successful franchises are wide! Service businesses routinely find success in franchising. The biggest determination factor in whether your business is able to be franchised is if you can replicate the service and you have documented systems.
Making the decision to franchise your business relies heavily on whether your business is ready. If you decide to move forward, you must make sure everything is together and the proper protections are in place before the first franchisee signs on. Doing this takes work and extensive legal knowledge that our lawyers at Denton Peterson Dunn are prepared to provide.
With offices in Phoenix, Scottsdale, and Mesa, our lawyers are prepared to draft your FDD and franchise agreement, and handle the trademark work that will protect your brand for the future. Schedule a consultation today to get started!
1930 N Arboleda #200
Mesa, AZ 85213
Office: 480-660-3249
Email: brad@dentonpeterson.com
Website: https://arizonabusinesslawyeraz.com
7272 E Indian School Rd #540-132
Scottsdale, AZ 85251
Phone: 480-690-3283
Email: service@dentonpeterson.com
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