The Foundation of Franchising

Responsible franchising is the only way that franchisors and franchisees will be able to harmoniously coexist in the twenty-first century. Responsible franchising requires not only a secure foundation for launching the program, but also a genuine commitment to the success of franchisees throughout the life of the relationship, from recruitment through growth, maturity, renewal or termination, and thereafter.

Any company considering the franchise model as a method of growth and distribution or any individual considering franchise opportunities as a method of getting into business must understand the key components of a strong franchise foundation:

A proven prototype location (or chain of stores) that will serve as a basis for the franchising program. The store or stores must have been tested, refined, and operated successfully and consistently profitable. The best practices and lessons learned from the prototype should be relevant and applicable to the target markets that domestic and overseas franchisees will operate. The success of the prototype should not be too dependent on the physical presence or specific expertise of the system’s founders.

A strong management team made up of internal officers and directors (as well as qualified consultants) who understand both the industry in which the company operates and the legal and business aspects of franchising as a method of expansion.

Sufficient capitalization to launch and sustain the franchising program, to ensure that capital is available for the franchisor to provide both initial as well as ongoing support and assistance to franchisees. (The lack of a well- written business plan and adequate capital structure are often the principal causes of demise of many franchisors.)

A distinctive and protected trade identity that includes federal and state registered trademarks, as well as a uniform trade appearance, signage, slogans, trade dress, and overall image.

Proprietary and proven methods of operation and management that can be reduced to writing in a comprehensive operations manual, that are not too easily duplicated by competitors, that maintain their value to the franchisees over an extended period of time, and that are enforced through clearly drafted and objective quality control standards.

Comprehensive training programs for franchisees that integrate all of the latest education and training technologies and that take place both at the company’s headquarters and at the franchisee’s proposed location at the outset of the relationship and on an ongoing basis.

Field support staff who are skilled trainers and communicators and who are available to visit and periodically assist franchisees as well as to monitor quality control standards.

A set of comprehensive legal documents that reflect the company’s business strategies and operating policies. Offering documents must be prepared in accordance with applicable federal and state disclosure laws, and franchise agreements should strike a delicate balance between the rights and obligations of franchisor and franchisee.

A demonstrated market demand for the products and services, as developed by the franchisor and distributed through the franchisees. The franchisor’s products and services should meet minimum quality standards, not be subject to rapid shifts in consumer preferences (e.g., fads), and be proprietary in nature. Market research and analysis should be sensitive to trends in the economy and specific industry, the plans of direct and indirect competitors, and shifts in consumer preferences. Also, understanding what business you are really in is important. For example, many of the major oil company franchisors thought that they were in the gasoline business until they realized that they were in the convenience business and quickly jumped into minimarts or fast-food and quick-service restaurants, either directly or via co-branding.

A set of carefully developed uniform site selection criteria and architectural standards that can be readily and affordably secured in today’s competitive real estate market.

A genuine understanding of the competition (both direct and indirect) that the franchisor will face in marketing and selling franchises, as well as of the competition the franchisee will face when marketing its products and services.

Relationships with suppliers, lenders, real estate developers, and related key resources as part of the operations manual and system.

A franchisee profile and screening system to identify the minimum financial qualifications, business acumen, and understanding of the industry that a successful franchisee requires.

An effective system of reporting and record keeping to maintain the performance of the franchisees and to ensure that royalties are reported accurately and paid promptly.

Research and development capabilities for the introduction to consumers of new products and services on an ongoing basis through the franchised network. A communication system that facilitates a continuing and open dialogue with the franchisees and as a result reduces the chances for conflict and litigation within the franchise network.

National, regional, and local advertising, marketing, and public relations programs designed to recruit prospective franchisees as well as consumers to the sites operated by franchisees.

Andrew J. Sherman is a Partner in the Washington, D.C. office of Jones Day, with over 2,500 attorneys worldwide. Mr. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies. Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he has taught courses on business growth, capital formation and entrepreneurship for over twenty-three (23) years. Mr. Sherman is the author of twenty-one (21) books on the legal and strategic aspects of business growth and capital formation. His eighteenth (18th) book, Road Rules Be the Truck. Not the Squirrel. (http://www.bethetruck.com) is an inspirational book which was published in the Fall of 2008. Mr.Sherman can be reached at 202-879-3686 or e-mail ajsherman@jonesday.com.