When to Franchise

June, 2016

Knowing when to change your business into a franchise, and knowing when to become a franchisee, are questions of vital importance to current and prospective business owners. The answer is different depending on whether you are the potential franchisor or franchisee. But those answers do not necessarily have to be oppositional and can be complimentary.

Types of Franchises

Franchises are typically separated into three categories. One, business format franchising, typical of hotels and fast food restaurants, involves the provision of products or services in association with a brand (trade-marks) according to an established system or method. The method of delivering the product or service is more important than the product itself.

Two, product franchising, typical of automotive dealerships, where franchises have consideration discretion in how they establish and operate the franchised business. The product itself is more important than the method of delivery.

Three, business opportunity franchising, typical of vending machines, has the franchisee obtaining the right to sell or distribute the franchisor’s goods or services. The franchisor may offer the franchisee assistance in choosing a location for the business.

Any decision on when to franchise should take into account the type of franchise being considered.

When to Franchise – Franchisor’s Perspective

It is in the best interests of the franchisor to change its business into a franchise when its business method, system, or product has proven to be satisfying a need in the marketplace. That method, system, or product will be the backbone of the franchise and the value gained by anyone becoming a franchisee. The ultimate success of a franchise depends on the soundness of the method, system, or product. Therefore turning a business into a franchise should not be considered until the method, system, or product is sufficiently refined and capable of being reproduced by franchisees after some, but not overly extensive, training.

Upon concluding that the business method, system, or product is sound, a franchise system can be considered where the franchisor desires assistance with a cost-effective expansion. After training, franchisees can assist with bringing the franchised system to new markets while at the same time providing initial fee, and later ongoing, payments to the franchisor helping with capital inflows to the franchisor. Newly established franchisees also act as a manner of marketing for the franchised systems by locating in new markets and gaining a reputation in the local marketplace.

When to Buy a Franchise – Franchisee’s Perspective

Before buying into a franchise, a potential franchisee needs to satisfy itself that the franchise system, method, or product is sound and consequently worth the investment of time and money. A franchisee can gain enormously from the experience and knowledge of a well-established franchisor. In areas such as marketing, branding, staffing, management, location, and pricing, new franchisees rarely possess expertise in most. It is in that instance that franchisors can provide significant assistance to the franchisee to give the franchised business the greatest chance to succeed.

When evaluating a franchise opportunity, a potential franchisee along with the assistance of advisors such as accountants and lawyers should assess the soundness of the franchise system, method, or product. That assessment may be conducted by looking at several indicators about the franchise that can tell you whether the investment in a franchise would be a good one.

A franchisee should look at whether the industry in which the franchise operates is growing and whether the franchisor has been successfully in establishing new franchisor-owned franchise locations and franchisee-owned businesses.

A prudent potential franchisee should discuss the business with current franchisees to gain insight into franchisor-franchise relations, franchisor support of franchisees, marketing and advertising support, and the success of the method, system, or product in the marketplace.

A careful review of the financial statements of the franchisor is essential. During the discussions about a potential franchise, the investor should evaluate the responsiveness of the franchisor, and look for evidence, such as from current franchisees, of good franchise management.

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Ryan K. Smith is a Lawyer and Trade-mark Agent at Feltmate Delibato Heagle LLP. He is a corporate and commercial lawyer with expertise in all manner of intellectual property matters including trade-marks, copyrights, domain names, and confidential information. You can reach Mr. Smith at (905) 287-2215 and rsmith@fdhlawyers.com