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Laguna Beach, CA 92651
Ph: (949) 376-9977     Fx: (949) 494-3448     Email: rodhatter@fran-law.com

Frequently Asked Questions About Franchises

Q: What makes a good franchise?
Q: Why are so many people interested in franchises?
Q: Is there a difference between a "franchise" and a "license"?
Q: What is the best franchise to buy?
Q: What is required to start a franchise program?
Q: How many outlets are required before starting a franchise program?
Q: How much will it cost to start a franchise program?
Q: Which is the most successful franchise in history?
Q: Why did the states and federal government restrict franchising?
Q: Which states have laws regulating the sale of franchises?
Q: Do you have to file and be approved by each state?
Q: Do you have to file and be approved by the Federal government?
Q: Does a prospective franchisee need an attorney before buying a franchise?
Q: What is the most important thing to consider in franchising?




Q: What makes a good franchise?

A. While there are no limits on what can be a franchise, a good franchise concept typically involves a well-tested business concept which is identified by a strong or "catchy" brand name and has a well-developed and successful marketing system.

Q: Why are so many people interested in franchises?

A. 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.

Q: Is there a difference between a "franchise" and a "license"?

A. 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.

Q: What is the best franchise to buy?

A. 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."

Q: What is required to start a franchise program?

A. 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.

Q: How many outlets are required before starting a franchise program?

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

Q: How much will it cost to start a franchise program?

A. While some franchise companies have spent as much as $200,000 and more to start a nation-wide franchise program, a good, well formulated franchise program can be prepared and registered for use in many states for between $20,000 and $30,000. The first initial fees often recoup that cost.

Q: Which is the most successful franchise in history?

A. 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.

Q: Why did the states and federal government restrict franchising?

A. 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.

Q: Which states have laws regulating the sale of franchises?

A. 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.

Q: Do you have to be filed and approved by each state?

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

Q: Do you have to file and be approved by the Federal government?

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

Q: Does a prospective franchisee need an attorney before buying a franchise?

A. 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.

Q: What is the most important thing to consider in franchising?

A. 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.