Business owners are often in a unique position if they are considering expanding their brands through franchising.
Determining the method of expansion should involve research and some honest conversations among shareholders. When done well, franchising enables business owners to grow their brands quickly and economically. We will discuss some considerations on how to expand your business – either through a franchise system or a chain of branded locations.
Franchise or Chain?
The decision to pursue franchising over another method of expansion is a strategic one. Owners can certainly open and operate more locations in an area without creating a franchise. This makes me think of the question I am often asked: “What is the difference between a franchise and a chain?”
Below are the definitions I use to guide clients and potential franchisors.
Franchise. Franchising is a business model whereby the franchisor grants the franchisee a right to operate a business using the franchisor’s trademarks and business system. The franchisor often provides significant assistance to the franchisee, but also imposes controls over how the franchisee operates and markets the franchise. In exchange for these rights, the franchisee pays the franchisor a fee.
When the owner of a business is ready to expand the brand’s presence through franchising, there is a key question to ask:
“Are you willing to forego the day-to-day control of each unit in exchange for franchisees investing their own money and assuming the risk at those locations?”
This question is at the core of franchising.
Business Chain. Two locations of your local donut shop, for example, may not be franchises. It may be a “business chain” if the ownership is associated with one corporate entity or affiliated entities (controlled by the same owner(s)).
When it comes to franchising, “chain” is a term that is often used when talking about the specific brand or franchise system including all of the locations and both the franchisees and the franchisor.
Walmart is a chain of stores, which are ultimately owned by a single parent company; whereas Wendy’s and McDonald’s are franchise chains, since franchisees own select locations.
With those definitions in mind, the ultimate goal of a franchise system is to operate as though it were a corporate chain ensuring customers have identical experiences in any location.
When a business owner decides to expand the chain through franchising, one of the next steps is to create the Franchise Disclosure Document (FDD). The FDD contains information on 23 items about the franchisor and the franchise system and must be provided to prospective franchisees before they purchase the franchise. You can learn more here.
Know The Limits
Franchisors have the freedom to operate in a wide number of territories. However, expansion should be supported by market research and in-depth due diligence. For example, a town or city’s zoning laws might not allow a chain of stores (whether franchised or corporate-owned), so consulting the local chamber of commerce, or town or city hall is a wise strategy even before reaching out to your franchise lawyer.
This proactive step will keep you – the new franchisor – and your franchisees informed when determining where and how to expand your business.
We Can Help
Lusthaus Law P.C. has a proven record of assisting franchisors and franchisees at every stage of development. We are committed to our client’s success and keep our finger on the pulse of the industry to ensure that we provide the best and most up-to-date franchise law counsel.
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path towards your franchise’s successful future. For more information, download Lusthaus Law’s free e-book, A Guide To Franchising Your Business.
