From McDonald’s to Wendy’s, Hair Cuttery Hair Salons to Planet Fitness gyms, most people have visited at least one franchise. While you may recognize a franchise as a consumer, owning one has a very different perspective. If you’re considering opening a franchise, you’ll want to make sure you know the basics before you invest your time and money.
What Is a Franchise?
A franchise, or franchising a business, is a method of distributing that business’s products or services. It typically involves:
- Franchisor: The person or company that established the franchise’s brand, trademark(s), and business system.
- Franchisee: The person or company that pays a royalty and other fees for the right to do business using the franchisor’s brand, trademark(s), and system.
- Franchise: Often thought of as the business itself, it is the contract between the franchisor and franchisee.
Franchises are businesses that operate in multiple locations. That could extend to multiple towns, cities, states, or even countries using the same (or as similar as possible) business systems. For example, people can go into a McDonald’s anywhere in the World and order a Big Mac. While minor structural details of the building’s exterior and interior will be different, the overall look and feel of the business remain the same.
Franchisees can own their own business without having to start from scratch. They benefit from having corporate support that may include operations manuals, employee training, brand standards, and quality control. Also, they often receive marketing training and strategies and business advisory support. They help them operate the franchise without too much of a learning curve.
What Are the Main Components of a Franchise Offering?
When starting your own business from scratch, you must pull together your resources. You have to figure out your business system, brand, trademark, and what you’ll sell, among other details. On the other hand, purchasing a franchise is almost a hybrid of starting your own business and working for someone else. While you own your franchise location, you also receive certain benefits from the franchisor that gives you a foundation on which to build your franchise business.
The main components of a franchise offering typically include:
Application
Like an employment application, you may be required to fill out an application indicating that you have the financial assets to start and support the franchised business as well as showcasing any skills and qualifications you may have.
Franchise Disclosure Document (FDD)
This is a federally and state-regulated document containing 23 specific disclosures that the franchisor is required to make to the franchisee before the franchisee invests. This document contains information such as the franchise’s corporate information, the franchisor’s business experience, litigation and bankruptcy history, initial fees the franchisee will need to pay, and more.
Franchise Agreement
This document is similar to the FDD. In contract format, this document outlines the same disclosures as the FDD. It also includes the franchisor’s and franchisee’s roles and responsibilities, and the terms, conditions, and obligations of both parties.
Operations Manual
These are all the relevant details of running the franchise business for both day-to-day and long-term operations. This manual outlines the rules, regulations, guidelines, suggestions, and the franchisor’s experiences for the franchisee. It is intended to give the franchisee all the information they need to run the business in a way that avoids legal trouble and keeps it consistent with the other franchises.
Training Program
The training program is typically face-to-face training based on the operations manual. It is an opportunity for the franchisor to train the franchisee, managers, and other key staff while also offering feedback so that they can learn, grow, and develop the franchise more easily.
Marketing and Promotion Program
This program assists the franchisee with marketing and promoting the franchise location. It usually supports franchisees as a group (as opposed to each franchise location having its marketing that may not match any other franchise location), generating greater awareness for the brand and business as a whole, and potentially creating new franchisees in other locations.
What Kind of Laws Are There About Franchises in New Jersey and New York?
The Federal Trade Commission (FTC) only has one specific rule when it comes to franchises: the Franchise Disclosure Document and the disclosure of the 23 items included in that document. The FDD must be provided to the prospective franchisee at least 14 days before they sign any agreements or pay any money. The FTC offers a guide for consumers who are considering buying a franchise that offers additional helpful information.
New Jersey
New Jersey does not require franchisors to register their FDD with the state. However, state has enacted the New Jersey Franchises Practices Act which provides franchisees with some additional protections.
Some of the additional protections the NJ Franchises Practices Act offers include:
- Franchisors must provide at least 60 days’ notice of termination, non-renewal, or cancelation of a franchise and must provide the reasons for doing so.
- Within 60 days of receipt, franchisors must approve or object to a franchisee’s request and notification of intent to transfer or sell their franchise. If the franchisor objects, they must provide the reasons why. Failure to respond is considered approval.
- Franchisees cannot be required to sign a general release to enter a franchise agreement.
New York
New York requires franchisors to register their FDD with the state. This registration fee is $850 for the initial registration, and $250 a year to renew each year thereafter. Renewal must take place within 120 days of the end of the fiscal year or any time there is a material change to the disclosures. This registration requirement applies to franchisors who have physical locations, corporate offices, or sell franchises in New York.
New York also has additional rules that help protect franchisees. One such rule is that if a franchisor has insufficient shareholders’ equity or working capital, it must include a risk factor on the state cover page. This risk factor must indicate to the franchisee what their estimated initial investment will be and the amount by which it exceeds the franchisor’s equity or capital.
More information regarding New York’s laws and regulations for franchises can be found in the New York Franchise Regulations and the New York State Franchise Act.
Franchises Are an Opportunity
Franchises can offer an opportunity to entrepreneurs who are looking for a way to run their businesses without building from scratch. With the tools and resources provided by a franchisor, franchisees can build a solid business. It is important to read all the disclosures and fully understand what you are getting into, however. If you’re considering purchasing a franchise, you may want to speak with one of the experienced business attorneys at Brown & Blaier, PC. We can help you go over all the facts so you go all in with eyes wide open.