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Legal Questions of the New Franchisor

Starting a small business franchise will take time and effort, and your best bet for a successful franchise venture is to arm yourself with as much knowledge as possible before you dive into franchise development. Here are a few key legal questions and answers to help you on your way.

What is Federal trademark registration?

Any local business that is looking to expand through franchising should quickly apply for Federal trademark registration in order to give your brand national protection. Federal trademark registration can often take more than a year to go through, so it should be one of the first steps you take when starting to franchise your business. During your application, the U.S. Patent and Trademark Office will work to investigate who else may have the same or similar names or logos, and once your franchise brand identity is trademarked it is protected from copyright infringment from other businesses, individuals and organizations.

What are franchise agreements and disclosure documents?

Before you can begin selling your franchise units you must prepare a franchise agreement and Financial Disclosure Document for your potential buyers. The franchise agreement is the contract that will exist between you and your franchisees spelling out what kind of ongoing relationship and support you will provide to your franchise buyers and what you expect from them. The disclosure document is a legal document that franchisors must provide to their investors detailing things like bankruptcy and litigation history, fees and expenses, territory, and restrictions on goods and services that a franchisee can offer. A franchisor must provide these disclosure documents to any prospect before they are able to sign any contracts or receive any fees.

What should the legal entity structure of my franchise be?

Oftentimes franchisors will protect their original business by setting up a limited liability company or corporation to act as the entity that sells franchise units. This company can be owned and maintained by the original business owners, or it can have different owners. The original business usually keeps the original trademark and licenses it to the franchise company. By working in this manner, both the original company and the franchise company are protected from the other’s liabilities. Additionally, by creating separate companies the owners are allowed to keep the finances of the original business hidden, and this prevents the owners from having to prepare financial statements of prior years of business which can be costly and time consuming. By consulting a skilled franchise attorney you can go over your options and find out what is the best action to take in your own franchise development process.

Who will I need on my team to start my franchise and protect my interests?

In order to properly protect your interests it’s important to have some key players on your roster who have a solid background in franchise agreements. Unless you’re a whiz with numbers and one hundred percent confident that you won’t make any mistakes, it’s a good idea to have a certified public accountant on hand to prepare your audited financials. Additionally, you will want to have a qualified lawyer available to help you draft your franchise agreement, Financial Disclosure Document, and deal with any filings that are required under state law. You may wish to employ a franchise consultant to help you with things like your initial research into the market, creating your franchise business plan and manual, however, for your own protection, it’s best to leave it to a specialized franchise lawyer to deal with any required legal documents.

How long does franchise development take?

From start to finish the franchising process can take at least two months but often much longer when taking into account the trademark process, and working within states that have their own separate requirements on top of Federal guidelines. For most businesses, it’s best to schedule in a year for the franchise development process to reach its completion, and remember that even though the process can take several months, you can use this time to continue to research and upgrade your skill set so that when opening day finally happens you’ll be completely prepared and ready to tackle the real work.

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