Board Certified Franchise and Distribution Law
Offices Established 1985

Frequently Asked Questions about Franchises

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Success depends on how you define it. SUBWAY appears to have sold the most franchises over a short period of time and has only a few non-franchised outlets. McDonald’s has certainly been a huge financial success, with most of its outlets being franchised outlets. Some say that Singer sewing machines was the earliest franchise in this country. Obviously, the oil companies have developed many dealer-operated gasoline stations over the years. Overall, franchising has been generally successful in many different areas. There seem to be no limits.

Selling franchises is somewhat like an “IPO” (initial stock offering) because outsiders are invited to purchase a part of a business. Franchising allows a business to expand more rapidly over a wider geographic area and share the risk (as well as the reward). Prospective franchises like it because they are able to invest in a business which has been developed and tested previously by the franchisor and perhaps other franchisees, who presumably have learned from their experiences and “debugged” the concept.

The words are too often used interchangeably. From a legal point of view, it makes no difference if it is called a franchise or a license. In general, “licenses” often refer to a less complex or less restrictive and cheaper business arrangement, but they can still be subject to the franchise laws. Well intended “licensors” later learn that they have been in violation of the franchise laws and have to pay penalties to correct the problem.

No one can answer that question accurately, but success nearly always depends on the strength of the underlying business product or service and the skill of the franchise operator. As usual, there is no “free lunch.”

A written franchise agreement is obviously a necessity. The Federal Trade Commission and about 15 states require that each prospective franchises receive a detailed Franchise Disclosure Document which describes the franchisor, the business, the franchise and many other types of information, including financial statements of the franchisor. Most of the 15 states also require obtaining approval of the Franchise Disclosure Document before offering or selling the franchises.

There is no legal minimum, but there should be at least one well-tested and successful outlet upon which the franchise should be based.

While some franchisors have spent over $200k to set up a Franchise Program, the total cost for a Franchise Program registered in California is less than $30k. Each additional state registration is estimated at the cost of $1,500.

In the sixties, there had been a rash of over zealous sales of franchise with a lot of unreal promises and “guaranties,” very similar to what had happened in the securities area years before. As a result, California and other states passed franchise disclosure laws patterned after the state securities laws, which basically required full disclosure of all the necessary facts so that a prospective buyer could make a fully informed choice. Violators are faced with both criminal penalties and civil damages.

Unless it is somewhat exempt, a franchisor must take action in at least the following states before offering or selling franchises: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Texas, Virginia, Washington and Wisconsin.

No, many have simple filing requirements or total exemptions for specific situations.

No. The FTC does not require any filings, just compliance with its disclosure requirements, which are similar to the state requirements.

Because a franchise usually involves fairly complex legal agreements and a very substantial financial investment, a potential buyer should consult with both a financial advisor and an attorney before making a commitment. That is no guarantee of success, but it is usually a small price to pay before making a very big investment. The same is true in regard to a commercial lease, which can involve a very long term and expensive commitment. As usual, advice tends to be worth what you pay for it, but it is important that you understand what your contract means and may mean. An exit strategy is an important part of business planning.

YOU. This is always a very personal business decision. Your success will always depend greatly on your own personal efforts and skills. Franchising may be a good way to implement and help develop good leadership skills. We provide guidance for each of our clients that is needed to feel comfortable about making the right decision.