Tim Gillis, Attorney at Law of Jacksonville law firm GILLIS WAY & CAMPBELL was recently interviewed for his knowledge and experience on business franchising and business law.
Q: How do I know if my business is franchisable?
Gillis: When you are first determining if you are going to franchise your business, there are a couple of things you want to think about. First, you need to determine if your business is actually replicable. Franchises are carbon copies of each other and that is what really builds the value in the mind of the consumer. They know they are going to get a consistent product every time they go to XYZ franchise.
You will need to determine if your business is something that can be consistently replicated over and over. The next thing you want to think about is if you want to be in the business of franchising. Once you are in the business of franchising, you are no longer in your original business. Your business now becomes selling and managing franchises, which is significantly different than running your original business.
Finally, give some real thought to the strength of your intellectual property. One of the most important things in a franchise system is brand consistency. You need to have a strong trademark and other intellectual property that you can protect and your other franchisees can use.
Q: Once I decide to franchise my business, how do I comply with franchise law?
GIllis: Franchising is highly regulated, so once you decide to franchise your business, compliance is the most important thing, other than getting the contracts right. There are a number of contracts that govern the franchise relationship. A Franchise Agreement is the one most people think of. There is also the Area Development Agreement as well as some other contracts that go along with the Franchise Agreement. All of these contracts, together with mandatory disclosures, need to be put together in a Franchise Disclosure Document, which is required by law, highly detailed, and something that must be prepared and given to your potential franchisees at your first personal meeting with them. There is a waiting period from the time they receive the Franchise Disclosure Document and all of the related agreements until you can accept money or sign binding contracts. It is very complex and something which takes a significant amount of time to prepare for.
Q: How does state registration come into play with compliance?
Gillis: There are certain states in the US that require you to submit your Franchise Disclosure Document and other registration materials to the State Regulator before you can actually try to sell a franchise in that state. For example, in Virginia, Maryland, New York, Illinois and California, it is a violation of law if you try to sell a franchise without registering in that state first. Florida is not one of those registration states.
Q: Can I just license my business instead of franchising it?
Gillis: Some people try to skirt the franchise law by doing a license, a trademark license or something similar. If structured properly, you can probably do that but you have to be very careful. There are usually three elements involved in a franchise. If all three elements are present, it makes up a franchise, no matter what you call it. If you have a trademark license, a fee that is paid to you, and you have substantial assistance or control, such as training or a marketing plan, then it is a franchise. If you have a franchise, even inadvertently, and you fail to comply with the law, then there will be consequences. Some states, New York for example, are very strict. You only need to have two of the three elements mentioned earlier in order to have a franchise. If you are going to be running a franchise, you really need to consult with a good attorney to make sure you are complying with the laws.
Q: What happens if I violate the franchise law?
Gillis: If you violate the franchise law, the consequences are severe. On the civil side, your franchisee, who bought the franchise from you, can probably sue you, get out of the contract, and collect damages from you. On the regulatory side, it is a crime so you could be criminally charged and heavily fined by the state or the federal government.
Q: What are the first steps in buying a franchise?
Gillis: If you have decided you want to become a franchisee and buy a franchise, you should do research. First, determine what kind of franchise you are interested in, what you like, what your passion is, and above and beyond that, what can make you money. Make certain to ask yourself how much time you want to invest. Running a business can often result in putting in more time than a full-time job would require every week. You may want to start by reading trade magazines to find out about different trends or new and popular franchises. You could also attend trade shows to meet as many franchisors as possible. However, keep in mind that they are there to sell you something, so keep a critical eye and evaluate your potential franchisors.
You then need to determine if you can actually afford to get into franchising. It is more than likely that you will not be able to keep your current job, so you need to figure out where you are going to get the money. Unless you have a history of running businesses, it is unlikely a bank is going to loan you the full amount that you will need to franchise, which can be a significant amount of money.
You want to carefully consider whether or not you should use savings or cash out retirement plans or other protected funds because since it is a business, it is a risk. While your franchise may be wildly successful, it may also fail. It is best that you consult with your lawyer, accountant, and financial advisors, as well as your family. Give it some real thought because owning a franchise is quite a commitment.
If you have additional questions about franchising or would like to schedule a consultation with Tim Gillis, Attorney at Law , please contact us online or by phone at (904) 647-6476.