Franchise Law FAQ

There is no set formula for payments from a franchisee to a franchisor. The most common payments are the franchise fee, which is set out in the UFOC/FDD document. This is a fee charged to participate in the franchise, and it is typically a one-time start-up fee. Additional fees include royalty payments (typically a monthly percentage of gross sales), shared advertising costs, and continuing training costs. A thorough review of the franchise agreement is recommended.

The first step is to map out how you are going to franchise the business. You need to be concerned about the products you sell, how you sell them, and the places you will be selling them. You then have to address logistics: how will the products be distributed and sold? How will you sell the franchised system to the franchisee? You will also need detailed financial statements and other materials about the business for your offering circular. Many of these issues should be identified prior to drafting the franchise agreement. Also, you will need to comply with various state and federal disclosure rules.

That depends on the kind of business you have. Does your business rely solely on your know-how and expertise? Or can you make a model of your business that can run without your constant supervision? If your business model lends itself to being easily cloned, such that you can train individuals how to run the business with minimal supervision, then the business might be one that can be franchised. In order to attract franchisees, the business should either be established or have a unique concept or product that will give it a competitive advantage.

A UFOC is a Uniform Franchise Offering Circular. This is a set of disclosures that companies selling franchises must give to potential buyers in advance. The disclosures include a synopsis of the franchise agreement, financial information about the business and its owners along with several other useful items to assist potential buyers. On top of the federally required disclosures, many states also require franchisors to supply additional information.

An FDD is the updated term for UFOC. An FDD is a list of disclosures that a franchisor is required to disclose to potential franchisees regarding the franchise offering, start-up costs, and a summary of important terms contained in the franchise agreement. Like a UFOC, an FDD is required in all fifty states. However, some states require additional disclosures.

A franchise is a useful tool to grow a business where the owners have a profitable business model that can be easily replicated but you do not have the time, energy, or capital to open new locations. The franchise model allows business owners to grow the business and the brand with less capital compared to opening individual locations. Additionally, franchises, if structured properly, should attract motivated individuals who will have substantial time and money invested into the franchise (and hopefully try to make the franchise profitable.)