A Brief History of Franchising | Washington D.C., U.S.

The History and Evolution of Franchising

The word &#;franchise&#; is derived from the Anglo-French word meaning &#;liberty.&#; In Middle French, it is &#;franchir&#;&#; to free. In Old French, it is &#;franc,&#; signifying free. The French term &#;francis&#; means granting rights or power to a peasant or serf. The English term &#;enfranchise&#; is defined as empowering those who have no rights. The term &#;Royal Tithes&#; is the predecessor of royalties, and originated as the practice of certain English men (referred to as &#;freemen&#;) receiving a percentage of the land fees paid by serfs to nobility. Throughout history, franchising has promoted economic liberation, synergy, and opportunity, and has been true to its etymological roots &#; &#;freeing&#; commerce from many of the traditional chains that had bound it. Naisbitt&#;s famous comment in Megatrends is no exaggeration &#; &#;Franchising is the single most successful marketing concept ever.&#;

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This article provides a brief timeline on the seminal developments in franchising since the Middle Ages, followed by a more detailed description of the flourishing history of McDonald&#;s and KFC, the historical intersection between franchising and antitrust law, and finally, a brief overview of the regulatory framework that has emerged over the past thirty-five years.

I. THE HISTORY OF FRANCHISING

A. Kings, Courts and Lord &#; Franchising Pre-

&#; During the Middle Ages, local governments granted high church officials and other personages a license to maintain civil order and to assess taxes. Medieval courts or lords granted others the right to operate ferries, hold markets, and perform professional business activities. The licensee paid a royalty to the powers that be in exchange for, among other things, &#;protection.&#; This was equivalent to a monopoly on commercial ventures. The practice was perpetuated throughout the Middle Ages, and eventually became part of European common law.

&#; During the Colonial Period, European monarchs bestowed franchises on daring entrepreneurs who agreed to establish colonies and gain the protection of the &#;Crown&#; in exchange for taxes or royalties.

B. Drinks, Cars and Sewing Machines &#; Franchising From to

&#; In 19th Century England and Germany, pub proprietors with financial difficulties became exclusive distributors of beer purchased from specific brewers. The breweries did not exercise any day-to-day control over the pubs.

&#; The first franchise in Australia under &#;royal privilege&#; was granted by Governor Macquarie in . The franchisee was granted the right to import 45,000 gallons of rum over three years in exchange for building the Sydney Hospital (the so-called &#;rum hospital&#;). &#; In the United States during the mid-&#;s, trademark/product franchising developed when the Singer sewing machine company formed a franchise in . Due to the lack of necessary capital and the incipient stage of the sewing industry, Singer had difficulty in marketing sewing machines, and turned to franchising. Singer commissioned agents to sell and repair its line of machines. However, once the machines were accepted by the public, Singer changed its marketing strategy and commenced selling the machines through its company-owned outlets in the &#;s.

&#; In the &#;s, U.S. cities granted monopoly &#;franchises&#; to utility companies for water, sewage, gas, and later electricity. &#; In , William E. Metzger of Detroit, Michigan became the first official dealer/franchisee of General Motors Corporation (GM). Under GM&#;s system, dealers purchased the land and built the buildings for the dealership. In return, the dealers were allowed to buy GM&#;s vehicles at a discount. &#; In , Coca Cola sold its first franchise.

C. A Period of Steady Growth &#; Franchising From to

&#; In the early &#;s, Henry Ford franchised dealers for his Model T. The oil companies followed suit, franchising gas stations. &#; In , Rexall Drugstores began franchising. &#; In , Western Auto established dealership programs. &#; In , the &#;Ben Franklin&#; store systems appeared with general merchandise stores. &#; In , A&W established &#;walk up&#; root beer stands, and Howard Johnson offered his three flavors of &#;superior&#; ice cream from his Wollaston, Massachusetts drugstore. Howard Johnson&#;s franchised ice cream business expanded to a group of East Coast restaurants, and in , appeared on a state turnpike. &#; Between and , the following companies commenced franchise activities: Arthur Murray Dance Studios, Baskin-Robbins ice cream stores, Duraclean carpet cleaning services, McDonald&#;s, Howard Johnson Motor Lodge, and Harlan Sanders&#;s Kentucky Fried Chicken. &#; In , Dairy Queen established its th unit.

D. Build Along the Highway &#; Growth In Franchising from -

&#; Franchising in the U.S. exploded in the s. In , less than 100 companies had employed franchising in their marketing operations. By , more than 900 companies had franchise operations involving an estimated 200,000 franchised outlets. &#; In , Tastee Freeze established its th unit. &#; In the &#;s and &#;s, the development of business format franchising escalated, due in large part to the expansion of the service economy and President Eisenhower&#;s decision to build the Interstate Highway System (with its concomitant increase in automobile travel). Holiday Inn, Roto-Rooter, Dunkin Donuts, McDonald&#;s, Burger King, H&R Block, Lee Myles, Midas, 7-Eleven, Dunhill Personnel, Wendy&#;s, Pearle Vision Center, Dairy Queen, Orange Julius, Tastee Freeze, and Sheraton all began to franchise. &#; By the late &#;s, McDonald&#;s, Holiday Inn, and KFC were all approaching or had surpassed the one-thousand unit mark. &#; Between and , fueled by an ever expanding economy, an estimated 100,000 new franchise businesses commenced.

E. New Regulation and an Oil Embargo &#; Franchising to

&#; In , annual retail sales for franchises were estimated at over $95 billion. &#; In , the U.S.&#;s 181,000 franchised gasoline stations accounted for 82% of product/trade name franchises and nearly 55% of all franchises. &#; Also in , California became the first state to regulate the sale of franchises when it enacted the California Franchise Investment Law (CFIL). &#; In , annual retail sales of franchised businesses were estimated at over $114 billion. &#; Between and , an additional 50,000 franchised units took form, and by , franchised businesses exceeded 374,000 units.

&#; Between and , due to the Arab oil embargo, national shortages of gasoline precipitated the closure of nearly 32,000 franchised gasoline service stations. &#; In , retail sales of franchises exceeded $161 billion. &#; By , gasoline&#;s share of total franchising fell to 41%, and, by , to 36%. &#; Between and , more than 19,000 new franchises were established; however, the increase did not offset the loss of gasoline franchises during the decade. &#; In , the Federal Trade Commission (FTC) adopted the FTC Rule involving pre-sale disclosures, which became effective in . &#; In , retail sales of franchises exceeded $274 billion, an increase of 140% from . &#; By , there were more than 356,000 franchised businesses, 18,000 less than the peak level achieved in . Product/trade name franchise sales reached $231 billion, an increase of 129% from . Sales by business format franchises tripled from $16 billion in to $48 billion in . &#; In , retail sales of franchises exceeded $474 billion.

F. Big Overall Growth Returns &#; to

&#; In , the U.S. Department of Commerce estimated that retail sales by franchised establishments represented 34% of all retail sales. Sales of products and services by all franchises grew by $198 billion during the period of -. &#; During and , an additional 50,000 new business format franchises were established, nearly double the number added during -.

&#; In , there were more than 416,000 franchise businesses, employing approximately 7 million workers, with estimated sales of $543 billion. The mix was approximately 70% business format, and 30% product franchise. The estimated 27,273 new franchise units that opened in represented the addition of one new franchise unit every twenty minutes throughout the year.

&#; Between and , franchises added over 400,000 new jobs to the United States economy, while the Fortune 500 companies added only 10,000 (i.e., franchising accounted for 40 times as many new jobs). &#; In , retail sales of franchises exceeded $607 billion, with more than 460,000 units in existence. &#; In , NASAA unanimously adopted the UFOC Guidelines as the recommended format for franchise disclosure documents at the state level. The FTC approved the use of the UFOC as an alternative to the FTC&#;s disclosure requirements later that year. &#; By , the new UFOC Guidelines were adopted by each of the state franchise regulatory authorities that require registration of franchise offerings.

F. The Current Status and Reasons for New Growth &#; to the Present

Advances in technology, orientation towards a service economy, a relative decrease in the importance of product franchising, an expansive interstate road system, active baby boom retirees looking to &#;be their own boss,&#; and women in the work force, have all contributed to the burgeoning rise in business format franchising. According to a survey conducted for the International Franchise Association&#;s Educational Foundation, as of , there were more than 767,483 franchise-related businesses (including franchisor owned), generating 9,797,117 jobs (equivalent employment of all manufacturers of durable goods, such as computers, cars, trucks, planes, communications equipment, primary metals, wood products, and instruments), meeting a $229.1 billion payroll, and producing $624.6 billion of output. The same survey found that franchised businesses in accounted for 7.4 percent of all private-sector jobs, 5.0 percent of all private sector payrolls, and 3.9 percent of all private sector output. Business format franchising accounted for 4.3 times as many business establishments as product franchising, and four times as many jobs, and operated more establishments, met a greater payroll, and generated more output in business services than in any other single line of business. The quick service restaurants hired more people than any other business format segment, and automotive and truck dealers employed more workers and had the greatest payroll of any other product distribution franchise. Jobs and payrolls in franchised businesses were greatest in California, Texas, Florida, and Illinois in . Relative to the size of the statewide economy, franchising had the greatest impact on jobs and payrolls in Nevada, Arizona, New Mexico, Florida, and Mississippi.

Studies indicate that a new franchise business opens approximately every five to eight minutes of each business day, and that franchises are, on average, more profitable than company owned locations. This holds especially true for franchisors in the fast food industry. 50% of all franchise companies in existence started in the last 33 years, 70% of them in the last 45 years, and 97% of them in the last 55 years.

II. Two Short Case Studies &#; the Beginnings of McDonald&#;s and KFC

A. McDonald&#;s

Raymond Albert Kroc (&#;Kroc&#;), born in Chicago, Illinois, became a volunteer ambulance driver in World War I, a dance-band musician, a salesman, a representative for Lily-Tulip paper cups and plates, and, later in his career, a promoter of a milk shake mixing machine. Never completing high school, Kroc espoused a conservative, anti-regulatory philosophy, and fought for a modification of the minimum wage law to allow entrepreneurs to employ teenage and student workers.

In , Kroc visited the McDonald brothers&#; small San Bernardino, California, hamburger stand, because he was curious why the brothers needed so many of Kroc&#;s milk shake mixers. What Kroc found was a specialized labor system that produced quality sandwiches at an affordable price. Kroc obtained the exclusive license to market the McDonald name and methods, and founded McDonald&#;s Corporation. Kroc also opened a drive-in location in Des Plaines, Illinois, to demonstrate the business format&#;s profitability.

Along with his associate, Harry Sonnenborn, Kroc purchased the land to build franchise locations, and then rented the real estate to franchisees on long-term leases. This action increased access to capital funds. In , there were 37 McDonald&#;s locations, by there were 100 locations, and by , there were 228 locations. McDonald&#;s meteoric rise continued. In , Kroc assumed the title of Senior Chairman. By , there were 5,000 McDonald&#;s locations, and by , there were 10,000. At that point, McDonald&#;s estimated that it had sold 65 billion hamburgers to the eagerly consuming public. It has been estimated that McDonald&#;s purchases 7.5% of the total potato crop production in the United States.

B. KFC The story of Harlan Sanders is equally intriguing. In the Great Depression era of the &#;s, Sanders operated a gas station in Corbin, Kentucky, feeding weary travelers a unique fried chicken that earned Sanders accolades from the governor of Kentucky. From gas station owner to restaurateur, Sanders&#; business flourished until , when the new interstate road system left him impecunious, as his chicken restaurant was not sufficiently close to the interstate. In , Sanders took to the road and convinced restaurateurs in Kentucky, Ohio, and Indiana to pay him a five cent royalty for using his proprietary recipe.

By , there were 200 KFC franchised outlets, by , 600 outlets, and by the end of the decade, approximately 1,000. Sanders managed the burgeoning company from his home in Shelbyville, Kentucky, with a relatively modest staff. KFC continued to grow, reaching the 6,000 mark in the &#;s, and eventually 10,000 outlets.

III. Franchising&#;s Collision With Antitrust Law &#; to

Following the Supreme Court ruling in in Standard Oil v. United States, franchisors operated in a legal quicksand, unsure of whether their actions constituted violations of the federal antitrust laws. Standard Oil involved the issue of whether a required purchase agreement between a franchisor and franchisee could constitute a Clayton Act prohibition against tying or exclusive dealing. Two years later, the Court in United States v. Richfield Oil Corp, further complicated the issue by stating that Richfield&#;s relationship with its franchisees both: (1) constituted an unreasonable restraint of trade in violation of the Section One of the Sherman Act, and (2) resulted in a substantial lessening of competition in violation of Section Three of the Clayton Act. This led to decades of legal and academic debate on the antitrust implications of franchising. Leading the charge in the &#;s were the Antitrust Division of the Department of Justice (which also took an aggressive stand on mergers and acquisitions during this period), as well as the FTC. Both held the view that economic imbalances in the franchisor/franchisee relationship needed to be rectified through taking a hard line on tying arrangements.

The conundrum was resolved in the Carvel cases in the mid-&#;s, and led to a resurgence in franchise activity. The Federal Court of Appeals and the FTC separately ruled that the Carvel trademark licenses set a critical element in the franchise arrangement, and were not anti-competitive illegal ties, but rather, a necessary component in preserving the franchisor&#;s goodwill. However, the pendulum swung back against franchising in Siegel v. Chicken Delight during -. The Federal Court held that the trademark could not shield an illegal tying arrangement. The FTC followed suit in , ruling that the franchisor could not force feed a franchisee product as part and parcel of the franchise arrangement. This resulted in numerous class action lawsuits against franchisors.

This heavy-handed federal regulatory approach lasted until , when the Supreme Court decided the landmark GTE Sylvania case. In GTE Sylvania, the Supreme Court distinguished vertical restraints intended to hinder competition from those that may have &#;redeeming virtues&#; in promoting inter-brand competition, by permitting a manufacturer to compete more efficiently, or by assuring the safety and quality of products to consumers. Since franchise agreements generally have such &#;redeeming virtues,&#; the decision was considered a victory by franchise proponents and entrepreneurs. Gone were the Standard/Richfield days of excessive scrutiny and overbearing antitrust regulation over independent businessman who benefited industry and commerce. Instead of being judged illegal tying arrangements per se, the rule of reason (competitive analysis of the relevant market) carried the day and judged the franchise bundle of goods and services as an integrated format for doing business. GTE Sylvania also had the practical effect of dramatically increasing franchise activity post-, and of refocusing the FTC&#;s concerns away from anti-competitive ties, and towards earnings claims and pre-purchase disclosure. The FTC&#;s disclosure investigation culminated in the Franchise Rule of .

IV. The History of Franchising&#;s Regulatory Environment

Concomitant with the enormous growth of the franchise industry came the growth of franchise abuse, and with the abuse, industry regulation. The notion of &#;fairness&#; began to pervade the regulatory scene by the &#;s, and franchise fairness provisions began to appear in federal legislation in the Automobile Dealer Franchise Act of , the various franchise bills introduced in Congress in the s, and the Federal Petroleum Marketing Practice Act of .

In the mid-&#;s, due in part to the failure of Congress to enact any franchise fairness legislation, as well as the perceived bargaining inequality between franchisors and franchises, many states adopted franchise relationship laws to prevent abuses involving encroachment, renewal, performance standards, assignment, free association, discrimination, and wrongful termination. Although there were brief attempts to regulate franchises by treating them as a type of security (an &#;investment contract&#;) to provide federal statutory protection for consumers, the notion that a franchise was akin to a security never gained solid legal footing, in part due to the fact that a security is a passive investment while a franchise requires active involvement by a franchisee.

In and , legislation was introduced in twenty-two states impacting franchise sales or relationships, including amendments to existing franchise disclosure statutes, fairness statutes, dealer relationship, and business opportunities laws. During , the number of franchise or dealer-related legislative proposals increased substantially, with a record forty-nine new statutes or amendments enacted into law. The pace persisted. In , forty-three franchise or dealer-related statutes were enacted by twenty-five state legislatures, including regulatory changes to the franchise statutes in Michigan, Minnesota, New York, and North Dakota.

Many states have enacted some form of a &#;little FTC Act,&#; prohibiting unfair methods and deceptive acts in trade or commerce, as well as industry relationship laws regulating automobile dealerships, gasoline franchises, farm equipment dealers or alcoholic beverage distributorships. Nearly 75% of the states have business opportunity statutes prohibiting fraud and misrepresentation in the sale of certain types of franchises and business opportunities. Business opportunity scams have been a major focus of FTC enforcement over the years. Since , the FTC has organized at least six coordinated sweeps with various state agencies focused on fraudulent business opportunities, with a recent sweep dubbed &#;Project Busted Opportunity.&#; The FTC has brought over two hundred law enforcement actions against 640 respondents under Section 5 of the FTC Act and the Franchise Rule.

There are fifteen states which have enacted statutes specifically regulating franchise solicitations and sales (California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin). These states account for one-third of the nation&#;s population, more than a third of all the franchises, and the overwhelming majority of all franchise enforcement actions. Although there were great similarities, there were many differences as well among the statutory enactments. For example, disclosure requirements in Illinois, North Dakota, South Dakota, New York, and Washington required specific language referencing franchise renewal, arbitration, and termination. Virginia required estimating annual costs of operation, while Wisconsin prohibited substantive changes to renewal agreements. Minnesota required acknowledging a franchisee&#;s right to use the franchisor&#;s trademarks, while California required reference to the policy prohibiting non-competition covenants.

Following the United States&#; model, Australia, Canada, China, France, Indonesia, Korea, Malaysia, Mexico, Romania, and Spain, among other countries, have enacted disclosure laws, many of which have Rule 436&#;s requirement of disclosure to prospective franchisees ten days prior to the execution of the franchise agreement.

As regulation became more pervasive, it also grew more complex. In response, in August , the National Conference of Commissioners on Uniform State Laws (NCCUSL) recommended a Uniform Franchise Act for greater uniformity and coordination by state legislatures. An alternative Model Franchise Investment Act was circulated in draft form in mid- by the North American Securities Administrators Association (NASAA), which embodied a more stringent regulatory approach, including a strongly-worded good faith standard, and rigorous restrictions relating to franchise termination, renewal, and transfer. To counter the claims of abuse in franchising, the International Franchise Association (IFA) instituted self-policing mechanisms including a Code of Ethics, and organizations such as the American Association for Franchisees and Dealers (AAFD), and the American Franchise Association (AFA) began to flourish. The stated goal of these entities was to educate regulators, franchisors, and franchisees on a &#;win-win&#; approach, and &#;level the playing field&#; for all concerned.

Although federal legislation has never been adopted, over the last decade the Congress repeatedly introduced a version of the Federal Fair Franchising Practices Act (&#;FFFPA&#;), initially introduced by Congressman John LaFalce (D-NY) in the early &#;s. The bill would allow a private right of actions for damages, recovery of attorneys&#; fees, as well as actions by state attorneys general. The bill would regulate both disclosure and the franchise relationship, and addresses fraud, discrimination in the sale of franchises, termination and cancellation, purchasing requirements, non-competition clauses, fiduciary, good faith, and due care duties, encroachment, and mandatory arbitration. After Chairman LaFalce lost the Chair of the Small Business Committee in , the prospects for successful passage of the bill became remote, although efforts are ongoing.

V. Conclusion

Given that franchising over the last century has been true to its roots in &#;freeing&#; commerce, the goal is to encourage the indomitable entrepreneurial spirit that has led to so many success stories, while simultaneously restraining the cupidity that has led to abuse in the past. It is the right balance of legislation, regulation, enforcement, oversight, self-policing, and education that will pave the way for franchising in this new millennium.

Do you want to learn about franchising, how to franchise your business, and how to know if you're doing it right?

In this guide you&#;ll learn what it means to franchise a business, how to franchise your business and the steps involved. We&#;ll also take a deeper dive into the legal requirements of franchising and tips on how to sell franchises.

Introduction: What Does it Mean to Franchise Your Business?

Franchising is a legal and business model that can help you grow your business.

When you franchise your business, as a franchisor, you will be granting franchisees the license and right to open new franchise locations that duplicate your business model, use your trademarks, and benefit from your training, business systems, and on-going support. In turn, franchisees will pay you initial franchise fees, on-going royalty fees, and will work to secure, open, and manage new franchise locations that will increase your overall system sales.

Franchising is regulated and requires compliance with federal and state franchise laws. When you franchise your business you'll be creating the legal documents, pre-sale disclosures, and operational requirements needed to comply with the franchise laws and sell franchises. The franchise agreement is the legal agreement that creates a franchise relationship and the franchise disclosure document is the pre-sales disclosure document that you'll need to sell franchises.

If you&#;re interested in franchising your business, you&#;re in the right place. This guide will provide you with a detailed understanding of franchising, get you on the right track, and help you franchise the right way. If you&#;re concerned about doing it right and avoiding missteps, you&#;re not alone &#; we&#;re here to help.

Below are links to help you navigate through the topics covered in this Ultimate Guide.

Advantages and Disadvantages of Franchising Your Business

What are the Steps to Take to Franchise a Business?

How Much Should It Cost to Franchise My Business?

5 Strategies to Help You Succeed at Franchising

Developing Your Franchise Sales Marketing Plan

Is Licensing an Alternative to Franchising?

Do I Have to Work with a Franchise Lawyer?

How Do I Get Started in Franchising My Business?

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Advantages and Disadvantages of Franchising Your Business

The advantages of franchising your business include the ability to increase system sales through new locations that are funded, developed, and managed by franchisees. Compared to organic growth that requires continued capital investments and management by your internal team, when you franchise your franchisees will supply the capital and resources needed to grow. You&#;ll also benefit from royalties and other fees that will be paid to you by franchisees and the ability to improve your supply chain and overall economies of scale as you grow.

The disadvantages of franchising your business include the reduced control that you&#;ll have over franchise locations, on-going franchisee support obligations, and legal requirements that you&#;ll be required to comply with. Compared to organic growth where you&#;re in direct control of your entire operations, when you franchise the success and failure of new locations will depend on the performance of your franchisees. You&#;ll also need to train and support your franchisees and comply with franchise laws and regulations.

What are the Steps to Take to Franchise a Business?

Franchising your business means that you have taken the legal and business steps to sell franchises, support franchisees, and grow your business. First and foremost, your franchise lawyer will have to prepare and issue a Franchise Disclosure Document that complies with federal and state law. When dealing with states that require FDD registration and filings, you'll also have to register or file your FDD with the state in order to be able to sell franchises.

The following are the steps to franchise your business:

• Determine if franchising is right for your business
• Issue your franchise disclosure document
• Prepare your operations manual
• Register your trademarks
• Establish your franchise company
• Register and file your FDD
• Create your franchise sales strategy and budget

1. Determine if Franchising is Right for Your Business

When it comes to franchising your business the most important step is to first determine if franchising is right for you and your business

Like every good business decision, franchising and the decision to franchise your small business needs to align with your long-term goals. As a business owner and founder when you franchise your business you're starting a new journey of learning franchising, entering the franchise industry, and building an organization that, in time, will be training, supporting, and helping future franchises succeed. Some of the factors that you should consider when making this assessment, include:

• Whether or not your business is scalable with systems that can be adopted by franchisees
• The profitability of your business and potential future profitability of your franchisees
• Your business model, industry, and the opportunity for growth
• Capital available to invest in franchising
• You personal goals and your interest in learning franchising and growing a franchise system.

Learn more about if your business is ready for franchising and if franchising is right for you.

2. Issue Your Franchise Disclosure Document

The franchise disclosure document, also called the FDD, is the legal document required by the franchise laws and is what you&#;ll need to franchise your business and sell franchises. Your FDD must be prepared and issued to comply with federal and state franchise laws, be specific to your business, and competitively position the franchise that you are offering. Because the FDD is a legal document it should be prepared by an experienced franchise lawyer.

The Federal Trade Commission requires that every FDD include 23 disclosure items that, together, include information designed to inform prospective franchisees about you, your franchise, and the legal obligations they'll be expected to follow. This includes information about your franchise agreement, franchise fees, royalties, on-going fees, start-up costs, territories, trademarks, financial performance representations, and more. Your FDD will include exhibits of the franchise agreement and all other legal documents that franchisees will be expected to sign when they buy a franchise from you and become a franchisee.

After your FDD is issued, you'll will have to update your FDD annually and, in franchise registration states, you must register your FDD with local state regulators before selling a franchise in the state. When selling franchises, you must disclose your FDD to prospective franchisees 14 days before they sign a franchise agreement or pay any fees.

3. Prepare Your Operations Manual

You will be providing a confidential franchise operations manual to your franchisees and during the franchising process you will prepare the initial version of your operations manual.

The franchise operations manual is the how-to guide for your franchise system and will serve as an important communication tool that allows you to inform franchisees about important system standards and requirements. Some of the primary topics that you will cover in your operations manual, include:

• Your Brand Purpose, Goals, and Vision
• Preparing to Open the Franchise Location
• Product and Service Requirements
• Designated Suppliers and Inventory Requirements
• Operations Standards
• Marketing and Administration Requirements

Since the operations manual is a confidential document, it's not disclosed in you FDD and is only provided to a franchisee after they sign a franchise agreement. Within you're FDD the only thing that will be disclosed about your operations manual is your manual's table of contents and the number of pages.

4. Register Your Trademarks

Because your entire franchise system will revolve around your brand&#;s trademarks, including licensing them to franchisees, registering your trademarks is an important part of the franchising process.

When you franchise your business, one of the most important legal rights that you will be granting to your franchisees is a license to use your trademarks. Your trademarks, your business name and logo are your brand, and if they are not registered with the United States Patent and Trademark Office (USPTO), they may not be protectable. One of the worst things that could happen is that you have a franchisee spend hundreds of thousands of dollars in a new franchise location and for this franchisee to find out that a local business owner is using the same or similar name, and not being able to stop them. With the proper USPTO registration you will be protecting your trademarks throughout the United States.

5. Establish Your Franchise Company

Your franchise company is the legal entity that will offer and sell franchises and should be formed during the franchising process and before issuing your FDD. Usually a corporation or limited liability company, your new franchise company will be in the business of selling franchises, supporting franchisees, receiving revenue in the form of initial franchise fees and royalties. So it's important that your franchising activity take place in a legally distinct corporate entity.

Forming a new franchise company is also an important step because because it allows you to shield your current business from future franchising obligations and streamlines the FDD financial statement reporting requirements. Within FDD Item 21 franchisors must include audited financial statements of their franchise company. By forming a new franchise company, you'll be starting off fresh with a new company that has very little to no financial activity. This means that your initial financial statements will be easier and less expensive to create.

6. Register and File Your FDD

Before you can sell franchises in the Franchise Registration States (including California, Illinois, Maryland, New York, Virginia, and others) or franchise filing states (including Florida, North Carolina, South Carolina, Texas, and others), you must first file and register within each state.

One common misconception that many new franchisors have is that the FDD needs to be registered with the federal government. Under the franchise laws, FDDs are not registered at the federal level. Rather, they must be registered at the state-specific level within the franchise registration states.

Once your FDD is complete and is issued, the next step is to register and file your FDD. To learn more about state-specific franchise laws, including FDD registration and filing requirements, check out our interactive franchise registration registration map.

7. Create Your Franchise Sales Strategy and Budget

Once your legal documents are complete, operations manual ready, and FDD issued, creating a franchise sales strategy and budget is critical. Evaluate your target franchisees, target markets, interest in your franchise and a realistic budget for attracting, training, and supporting franchisees. Follow these tips:

• When setting a budget understand that franchising is all about long-term success and wins and that no matter how much you invest in your franchise sales process, initially, you need time for your new franchise brand to season and take root. What sells franchises is unit level economics and franchisee validation. This means that the success of your initial 1, 2, 3 and 10 franchisees will determine the future growth of your franchise.

• When budgeting, consider costs associated with building your franchise sales website, building your franchise brand story, franchise PR that will validate your brand story, training and supporting franchisees, and your franchise sales goals. Your costs will directly reflect your franchise sales goals and whether or not your brand has organic reach with customers and others that know about your business and may be interested in buying a franchise.

The franchise development process typically takes between 90 to 120 days to go from where you are today to being a franchisor legally able to offer and sell franchises.

What Comes Next?

After you've franchised your business, the next step is to recruit and on-board qualified franchisees. You'll disclose franchisee candidates with your FDD and on-board qualified franchisees that will sign a franchise agreement, attend training, and open new franchised locations. Once you've turned your business into a franchise, you're just getting started.

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How Much Should It Cost to Franchise My Business?

The cost to franchise your business varies and, depending on who you work with, can range from $18,500 to $84,500. When evaluating the costs it's important to understand the difference between franchise development and franchise sales and how each represents a different stage of the franchising process.

• The Franchise Development Stage is where you compete the steps to franchising your business. As discussed in this guide, the franchise development stage includes everything from issuing your FDD through registering your FDD and creating your franchise sales strategy. Basically, it's everything that needs to be done before you can start selling franchises.

• The Franchise Sales Stage is when you start selling franchises. Although this is not a single stage and involves an on-going process of recruiting qualified franchisees, selling franchises and growing your franchise system, its important to plan and budget your franchise sales activities for your first 12 months as a franchisor. Below in this guide we provide a detailed breakdown of the franchise sales marketing channels that you should consider, how to position your franchise brand, and other important tips for selling franchises.

When you evaluate the costs to franchising your business, right now you should be evaluating costs associated with the franchise development stage.

What Determines Big Variations in the Cost to Franchise a Business?

It depends on who you work with and whether or not they are focused on long-term relationships and honest pricing. Be very careful when selecting a lawyer or franchise developer. Many vendors rely on the fact that there are things that you, as a soon to be new franchisor, just don&#;t know about the process. Some vendors will overcharge you or, worse, they&#;ll under charge you without you realizing that you are not doing things the right way. Look out for "franchise developers" who claim to do everything in-house, including the legal preparation of your FDD. It&#;s illegal for a franchise developer to have their own "in-house" lawyer prepare your FDD. For many good reasons, including your legal protection, accountability, and the need to maintain attorney-client privilege, your franchise lawyer must be independent and directly retained by you. You need to know that professionally they stand behind the legal advice and guidance that they provide to you.

Lower-cost options ($5,000 &#; $10,000 range) will end up costing you more in lost opportunity and future franchise violations. On the opposite end, higher-cost options ($80,000+) often times deliver a lot of "paper and forms" but really not much value.

Other costs include developing your operations manual. Many of our clients prepare their own operations manual. Most developers typically charge $15,000 &#; $20,000 for this service.

The Internicola Law Firm, charges from $18,500 to $34,000 for legal representation PLUS franchise development, planning, and support.

Tip: Do your research and look for transparency before engaging a team to develop your franchise. Ask for a detailed proposal and client references!

Learn more about the franchise development stages and how much does it cost to franchise your business.

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5 Strategies to Help You Succeed at Franchising

As you franchise your business, follow these strategies to help you succeed:

1. Set Realistic Goals.
   Franchising is more of a marathon than a sprint. Set realistic goals for what franchise success will look like for you. What are realistic sales goals in your first year and over the next two, three, four, and five years? The best time to start planning your five-year strategy is before you launch your franchise.
   
2. Research Your Competitors.
   You need to competitively position your franchise offering among your competitors. Within your FDD and franchise offering, you will be disclosing important cost metrics that include things like the initial franchise fee, the ongoing royalty rate, franchisee fee obligations, territory sizes, and a broad range of other legal and business factors that will influence the profitability of your franchisee&#;s operations and their overall rights. Evaluate your competition, understand their metrics, and work with your lawyer to ensure that your FDD is competitively positioned.
   
3. Develop Your Franchise Offering for Both Individual and Multi-Unit Sales.
   Having the ability to sell multiple franchise units to a single franchisee is important. Many times, franchisees want to acquire the right to develop and open multiple locations or operate in multiple territories. To be able to offer and sell both individual unit franchises and multi-unit franchises, your FDD must be structured to accommodate the sale of both and requires the development of both an individual unit franchise agreement and a multi-unit development agreement. Developing this dual structure will mean more upfront planning and work but, for the vast majority of industries, launching your franchise without the option to sell multi-unit franchises will put you at a competitive disadvantage.
   
4. Make Sure Your FDD Is Compliant for Every State.
   One of the most frustrating things for franchisors is being delayed and not being able to sell in their anticipated timeframe. From the start, your FDD needs to be multi-state compliant. This means it should be ready for registration and filing in every state. How to do this? As mentioned earlier, your lawyer needs to prepare your FDD on a "multi-state" basis. That is, your FDD should include &#; on a state-by-state basis &#; required addendums and modifications to make your FDD compliant with various state laws. This is especially important in the franchise registration states. Without this level of multi-state compliance, you risk compliance violations and potential roadblocks to future franchise sales.
   
5. Learn Franchising and Get Involved in the Franchise Community.
   Learn more about franchising and get involved in the franchise communities like the International Franchise Association. While your franchise lawyer is developing your FDD he or she should also be helping you learn franchising and get you involved with franchise organizations, networking events, masterminds, and other professionals and suppliers that will be of value after you set up your franchise.

Tip: Speak to other franchisors and always be thinking about next steps.

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Developing Your Franchise Sales Marketing Plan

There are a lot of moving parts involved in selling your first franchise and building a pipeline for ongoing franchise sales. It's critical to develop a marketing plan to cost-effectively sell franchises.

As you get started developing a franchise sales marketing plan, the following are some of the initial questions that you should be answering:

• What are my franchise sales goals over the next 6 to 12 months?
• What are the qualities and characteristics of my perfect franchisee?
• What is the value proposition of my franchise, what makes my franchise unique, and how can my franchise improve the lives of my franchisees?
• How much money am I going to invest in franchise sales over the next 6 to 12 months?
• What outside vendors should I be relying on to generate interest in my brand and to help me attract qualified franchisees?
• Does my website uniquely communicate my brand story and the advantages of becoming a franchisee in my system?
• Does my website include a lead capture form that encourages prospects to identify themselves and reach out for more information?
• Do we have a franchisee discovery and conversion process in place to inform and educate the prospect about our brand, the advantages of becoming a franchisee with us, and what success can look like for them?

Answers to these questions will allow you to build the framework for your initial franchise sales marketing plan and the positioning of your brand. These questions are designed to get you started, and what you&#;ll find is that, over time, your answers to these questions will evolve, change, become more refined, and, ultimately, lead to many other questions and franchise sales development processes.

Next, we&#;ll dive a little deeper into positioning your franchise brand with the right value proposition. This is one of the most significant marketing tasks that you must engage in. Even if you are working with a marketing team, as the founder or leader of your franchise brand, you need to be actively engaged in this process or you risk making one of the most common and costly marketing mistakes that start-up and emerging franchise brands make.

Position Your Franchise Brand and Build a Franchise Brand Story

Before you spend money on franchise sales marketing, its critical that you properly position your franchise offering. As a successful business owner, you understand the value that you deliver to your customers, what makes your brand unique, and what differentiates your brand and business from your competitors. Now, as you franchise your business, it's important to develop, refine, and communicate what differentiates you as a new franchisor. That is, what is the unique value that you offer to your future franchisees and why should a franchisee buy your franchise and invest in your brand, business, and systems.

So many franchisors, including large franchise systems that have been selling franchises for years, miss the mark on differentiating their franchise brand and communicating a compelling value proposition for franchisees. While the larger franchise brands have the money to get away with making this mistake, start-up and emerging franchisors like you don't. That's because your marketing budget is limited and your marketing dollars need to produce results during the emerging phase of your franchise system. You would think that franchise marketing companies would help start-up and emerging franchise brands avoid this mistake &#; but they don't. In fact, many times they help to perpetuate it through bad advice. The end result is franchise brands that all sound the same and fail to tell a compelling brand story and founder story.

If you make this mistake, your marketing dollars will be wasted on cookie-cutter "me too" franchise sales marketing campaigns and media that will either not work or, at best, result in unaffordable franchisee conversion ratios and costs.

Developing your brand story and a unique value proposition for your franchise brand takes time, so get started now. If done correctly, you'll magnetize your marketing that attracts qualified franchisees. Learn more about Building a Compelling Franchise Brand Story and Franchise Sales Website.

Evaluate These Franchise Sales Marketing Channels

Once you've established the value proposition of your new franchise brand and created your brand story, evaluate these franchise sales marketing channels. Some of these channels may be right for your franchise and some may not. Ultimately, you can't rely on just one, and we recommend you develop a good mix based on your brand, your industry, and your franchise sales goals.

1. Franchise Brokers and Broker Organizations
   Franchise brokers and broker organizations are an important part of the franchise sales process. Franchise brokers are typically part of larger professional organizations and they assist prospective franchisees in finding a franchise opportunity that matches their interests and available capital. We recommend working with reputable franchise brokers to achieve a portion of your franchise sales objectives. The cost of working with a reputable franchise broker far outweighs the fees that you will pay. However, you must be cautious about franchise broker organizations that charge high upfront entrance fees for joining their organization as a brand that their brokers will show to prospective franchisees.
   
2. Organic Web SEO (Search Engine Optimization)
   Building your website and web presence is an important long-term task. To get started, add a franchise opportunity page to your current website. The webpage should be focused on the value proposition of your franchise, your brand story and should include a lead capture form where someone interested in buying a franchise can enter their address and contact information in exchange for more information. Over time, you may develop a separate franchise sales website. Either way, you will need to develop web content that, in time, will help generate organic search engine traffic. Developing unique quality content for your franchise sales webpage or website is a win-win scenario. Although it will take time to generate web traffic from organic search results, the content that you develop will also serve as an important conversion tool for prospective franchisees who find out about your franchise through other marketing channels.
   
3. Paid Web (Pay-Per-Click Ads)
   Pay-per-click ads, or PPC, on Google and other search engines is relatively straightforward and there are many vendors that provide assistance in managing AdWords campaigns. As a new franchisor it's important that you evaluate when and how you can effectively use AdWords campaigns in your franchise sales marketing. We do not recommend pay-per-click ads until your brand is seasoned and you have the right conversion systems including, a compelling brand story and value proposition, conversion process, dedicated landing pages, and follow-up drip campaigns in place to maximize the value of your pay-per-click ads. When your franchise is ready for pay-per-click ads, start with limited and targeted campaigns that are focused on a subset of potential franchisee candidates within a targeted geographic area. Additional Recommendations:
   • Use Landing Pages - For all web campaigns, whether Google Ads or paid social media ads, develop and use dedicated web landing pages. Rather than linking paid ads to your home page or to the general franchise sales page of your website, your paid ads should be linked to dedicated landing pages that contain content customized to the ad and that will allow you to track the effectiveness of your marketing campaign. To learn more about landing pages, Unbounce does a great job of explaining what landing pages are and how to structure them.
     
   • Focus On Collecting Prospect Information - Although selling a franchise would be great, the goal of your paid ads should be to encourage prospects to fill out a contact form to learn more about your franchise. Once you have the prospect&#;s contact information, you can start a more active drip campaign where you communicate with the prospect, offer additional information, invite them to webinars, and engage in a more meaningful way.
4. Organic Social Media
   Just like your organic web strategy, creating content and engaging prospective franchisees organically through social media channels like TikTok, Instagram, Facebook, LinkedIn, and Pinterest is cost-effective and critical for franchise sales. Although your organic social media audience may be limited, these marketing channels will serve as an important validation tool for prospective franchisees who learn about your franchise.
   
5. Paid Social Media Ads
   As you build your social media presence and your organic audience, paid social media ads represent a great opportunity to reach targeted audiences. Your social media ads should be targeted to subsets of demographics of individuals who share interests, occupations, and skills consistent with perfect franchisees for your system.
   
6. Franchise Public Relations
   Franchise public relations involves promoting your franchise through third-party media channels that that include news and information about your franchise, the success of your franchisees, and the value that you offer. PR-driven media appearances can generate interest in your franchise brand and build credibility with franchisee prospects. Although PR appearances are, technically free, it&#;s still pay-to-play as you will need to hire and pay a good public relations agency to get you media exposure. When hiring a PR agency, it&#;s important to establish clear expectations as to the types of media placements that the agency can deliver for you.
   
7. Franchise Influencers
   Franchise influencers are credible authors, web content curators, and bloggers who have developed a specialized expertise and a following within the franchise community. These influencers offer valuable and credible information to prospective franchisees, and within certain parameters offer assistance in providing exposure to franchisors and franchise brands. For great insight into the work of one of the best franchise influencers, check out The Franchise King®.
   
8. Online Franchise Portals
   Online franchise portals are websites that list many franchise brands and position themselves as a resource for individuals looking for franchise opportunities. These online portals use organic SEO and pay-per-click ads to get visitors to their website. From there, prospects are encouraged to enter their information and are shown various franchise brands and opportunities. Online portals make money by charging franchisors like you a fee to be listed on their website and fees for you to buy prospective franchisee leads from the portal. Currently we do not recommend online portals for new franchisors.

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Is Licensing an Alternative to Franchising?

No, licensing is not an alternative to franchising. Sometimes, either based on bad legal advice or a lack of information, business owners enter into a license agreement believing that it is not a franchise, and therefore they do not have to go through the franchising process.

Here&#;s the catch: within every franchise is a license. The definition of what "creates a franchise" is so broad that license agreements end up triggering franchise liability and serious legal issues. If the business relationship that you are entering into includes (a) the license of a trademark, (b) the payment of a fee, and (c) an agreement where you will have a level of control over how someone operates their business, the business relationship is a franchise and you will need to comply with the franchise laws. Learn more about licensing versus franchising and the difference between them.

If you have already sold licenses, the good news is you can convert your license system to a franchise system.

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Do I Have to Work with a Franchise Lawyer?

If you are going to franchise the right way, you need to work with a lawyer who specializes in franchising and who is experienced in helping business owners like you turn a small business into a franchise.

A good franchise lawyer will be able to help you through each phase of the franchise development process and will provide you with franchise development insights and strategies that have worked for other brands. He or she will also help you avoid the mistakes and pitfalls of franchising that many start-up franchisors don&#;t know about or, unfortunately, find out about too late. Be careful because many franchise consultants pretend to be lawyers or have lawyers on their staff. However, what these consultants are really doing is practicing law illegally and harming many unsuspecting start-up franchisors who don't yet realize the legal importance of their FDD and future franchise agreements.

There are some really good franchise law firms out there. The right lawyer for you should understand your brand, believe in your goals and vision, and have the systems in place to guide and help you franchise the right way. Learn more about selecting the right lawyer in our Guide to Selecting a Franchise Lawyer.

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Can a Franchise Developer or Consultant Prepare My FDD Instead of a Franchise Lawyer? No. Your FDD is a legal document that requires the integration of federal and state-specific franchise laws and regulations and should only be prepared by a franchise lawyer directly hired by you.

If you have done a Google search about franchising your business, chances are you have come across search results that not only include franchise lawyers but also franchise consultants and franchise developers. You may not even notice a difference &#; and this may be intentional on the part of the consultants and developers, who attempt to appear as "one-stop shops" that also offer legal services. Franchise consultants and franchise developers are not franchise lawyers and they can&#;t provide you with legal advice; they can&#;t have their "in-house lawyers" provide you with legal advice; and they don&#;t possess the necessary training and expertise to prepare your FDD, register your franchise offering, and legally protect your brand. Your franchise lawyer should work directly for you and be directly accountable to you.

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How Do I Get Started in Franchising My Business?

By reading this guide, you&#;ve already taken the first step! Now that you have a solid foundation as to what franchising is all about and the steps involved, start building the right team to help support and guide you in franchising your business.

The Internicola Law Firm is dedicated to helping small businesses grow through franchising and we would be glad to learn more about your business, your growth goals, and if franchising is right for you. Learn more about our services to franchise your business and how we help you create a winning franchise or call us at (800) 976-.

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Contact us to discuss your requirements of retail store franchise. Our experienced sales team can help you identify the options that best suit your needs.