When starting a franchise brand, keep it simple!

Khalil Sheldon Franchise QuestionsBy keeping the franchising operation simple, a franchisor can channel more cash and resources to growth instead of overhead. Here are 11 tips.

1. Register Your Trademark Early

Trademarks are a cornerstone to franchising, so registration is a necessity.  But it can also save you fees in states where the ownership of a federal trademark registration exempts your business concept from state business opportunity laws.  At present, Connecticut, Florida, Georgia, Maine, North Carolina, and South Carolina fit in this category.

2. Stage Your Roll-Out

When a franchise company starts out, it has a choice.  It can attempt to register in all of the registration states for a nationwide rollout.  But that involves more cost:  more filing fees, and more attorney fees to prepare the registrations, filings, and respond to regulator comments.

Another strategy is a staged rollout.  A franchisor can register in just one registration state, to obtain a regulator’s approval, and then be positioned to offer or sell franchises in that state along with the non-registration and non-filing states.  After selling some franchises to generate cash, the franchisor can then turn to registration and filing in the remaining states.

3. Use Isolated Sales Exemptions 

Indiana, Minnesota, New York, and Washington State have isolated sales exemptions that eliminate the need to register a franchise offering for certain isolated franchise sales. Indiana’s exemption is perhaps the most useful, simply allowing one sale every 24 months. New York allows one isolated sale provided other criteria are met. The other statutes are more complex and counsel should be consulted before attempting to rely upon them.

4. Eliminate Territories

While not practical in all situations, if a physical presence is not the foundation of the business model, the elimination of a territories could save resources.

Mapping software and the personnel to administer it can be dispensed with along with site selection assistance.  Further, internal squabbles between franchisees as to an encroaching location or where advertising can take place and possible lawsuits in relation to territory rights are avoided.

5. Have Fixed Royalty and Advertising Fees           

Many franchisors require royalties and advertising fees as a percent of gross receipts or some other comparable formula. These types of formulas require bookkeeping systems, accountants, and sometimes even an audit team to dissuade and uncover under-reporting of gross receipts.

Imposing fixed dollar amounts for royalties and advertising fees that increase with the age of the franchise allows the franchisor’s revenue stream to grow along with its franchise owners with minimal internal accounting needs and no financial audits to locate unreported income.

Another advantage to fixed royalty and advertising fees is a potentially stronger Financial Performance Representation in Item 19 of your Franchise Disclosure Document because the franchisee’s incentive to under-report income is reduced or eliminated.  And a stronger Item 19 disclosure can lead to more franchise sales.

6. Wait to Finance

Franchisors are often tempted to offer financing in order to attract franchisees who could not otherwise afford to franchise or who cannot find external financing.  Franchisor supported financing programs, however, bring increased accounting costs and support to track and collect payments.  By delaying the implementation of an internal financing program and steering franchisees to external funding sources, those costs can be eliminated.

7. Create an Area Developer Program

Area Developers serve to increase upfront capital, reduce overhead, and promote franchise sales.  Recruiting Area Developers increases capital through the payment of their initial area developer fees.  Plus, well-connected or marketing savvy Area Developers can save internal selling expense by bringing in leads and franchisees that they generate.  Area Developers can also assume operational support duties reducing the franchisor’s staffing overhead.

8. Train Online

 Franchisors should take advantage of the advancements made in on-line education formats to cut costs.  Simple franchise concepts and update trainings particularly could take advantage of this resource.  Having on-line trainings will eliminate the need for class-room space, live staffing, and cost for catered refreshments.

9. Develop Advertising Templates

Protecting your trademark is vital to avoid misuse and dilution of the brand. As such, franchise agreements commonly require franchisees to obtain permission before using advertising bearing the franchisor’s trademarks. A franchisor can displace a multitude of individual proposed advertising submissions by franchisees by requiring franchisees to use online programs that contain pre-approved advertising templates where the only thing varied is the contact information.

10. Use Outside Supply Vendors and Packages

Warehousing and shipping functions can absorb huge resources including square footage, warehousing staff, and shipping expenses.  Instead, use of direct ordering through outside supply vendors and pre-approved supply packages can displace these costs.

11. Eliminate complex programs and individual variances

Sometimes franchisors offer programs of marginal benefit, or individual variances, that carry substantial administrative cost to carry. For example, small fees for a multitude of minor items could perhaps be displaced with a slightly higher initial franchise fee, royalty fee, transfer fee, or renewal fee.

About the Authors

Carl Khalil is a Partner in the law firm of Carl Khalil and Sada Sheldon, PLC.  He has 17 years of franchise law experience and previously worked as Corporate Counsel for Jackson Hewitt and Liberty Tax Service.  During his tenure at Liberty Tax Service, it grew from 35 offices to nearly 4000 offices and 100+ Area Developers.  He may be contacted at (757) 263-4596 or carl@khalilsheldon.com and his firm’s website is at www.Carl-and-Sada-Law.com.

Sada Sheldon is a Partner in the law firm of Carl Khalil & Sada Sheldon, PLC in Virginia Beach, Virginia, a nationwide franchise and trademark practice.  She is admitted to the State Bars of both California and Virginia.  She is a member of the ABA Forum on Franchising.  She can be reached at 757-263-4596 or at sada@khalilsheldon.com and her firm website is at www.Carl-and-Sada-Law.com.

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