Franchising is a flexible, tried and true method of distributing products and services and offers business owners an alternative avenue to expand their already successful businesses. One immediately thinks of McDonalds or 7-11 when the word “franchise” comes up, but there are literally thousands of franchise programs to consider in almost every line of commerce.

While most people have a general sense of the structure of the franchise model, particularly because of their first-hand experience dining at a fast food restaurant, few realize the breadth of businesses that successfully employ the model, despite their interaction with these businesses on a daily basis.

Businesses that are commonly franchised that are not obvious to the consuming public include accounting businesses, insurance agencies, tax preparation services, frozen yogurt businesses, children’s clothing stores, flower shop chains, gasoline stations and weight loss clinics. Some less common, yet innovative examples include custom closet design services, plumbing related businesses, pool cleaning businesses, pet supply and pet grooming businesses, beer and wine distributorships, golf and tennis training programs, health care clinics and senior care facilities, art stores, pest control businesses and janitorial businesses. The possibilities are endless!

Franchising is not right for all businesses. Franchises are highly regulated, and starting a franchise requires the investment of a lot of heart and soul, as well as a lot of time and money. Business owners must do their homework before deciding to franchise. This starts with understanding what by law constitutes a franchise and what steps must be taken before a business owner may offer the concept for sale.

Under California law, a business relationship is a franchise if:

• The business will be substantially associated with the franchisor’s trademark;
• The franchisee will pay a fee, directly or indirectly, to the franchisor for the right to engage in the business and use the franchisor’s trademark; and
• The franchisee will operate the business under a marketing plan or system prescribed in substantial part by the franchisor.

Franchising is regulated at the federal level by the Federal Trade Commission (FTC) which requires franchisors to prepare a franchise disclosure document (FDD) that complies with the FTC’s Franchise Rule.

In addition, 13 states, including California, have enacted franchise laws that require franchisors to register their FDD before offering franchises within their states. An FDD is an offering prospectus, that must be written in plain English and provides prospective franchisees with information pertaining to 23 specific items about the franchisor and the proposed franchise. The FDD must include, among other things, background information about the franchisor and its executives, fee and cost information, samples of the contracts franchisees will sign, and information about the franchisor’s trademarks and patents. Franchisors must also include audited financial statements in its FDD.

Once a business owner is familiar with the legal requirements of starting a franchise, he or she should take a good, hard look at his or her business to decide whether it is right for franchising. Franchisors must be able to sell franchises, so their franchises must be attractive to prospective franchisees.

A franchise is attractive if it is based on a concept that is sustainable in the marketplace. Franchises based on fad products or services rarely survive. To be sustainable, the concept must be unique enough to withstand competition, should be easily taught to others, should be adaptable to varying markets, should have successful operating procedures that potential franchisees are willing to pay to learn, and should be profitable for both the franchisor and its franchisees. The advantages to becoming a franchisee include:

• The greater likelihood of success from membership in a proven system rather than in a new business model and an immediate customer base for a known brand name with an already-established market presence.
• The power of collective group purchasing, internal marketing materials, professional oversight of the business, new product research and development and continuing education and training.

• Support from a franchisor and like-minded co-franchisees with similar goals, needs and pressures.

Franchising is a proven means for successful businesses to expand, but choosing to franchise one’s business is a decision that must be well considered. Understand the costs involved and the steps you must take before becoming a franchisor. Consider whether the business model will be attractive to potential franchisees and sustainable in the face of competition. And as a friendly reminder, check with an experienced franchise attorney to help you through the process.