Expanding your Company through Franchising

For those business owners in growth mode, this is a show for you. If you’ve wondered about the feasibility of expanding your company through franchising, you’ll first want to decide if the franchise business model is right for you. But how do you determine that? Why are some types of businesses right for franchising? What are some of the criteria for a promising franchise business? Are you the kind of owner who can allow someone to come in and run one of your locations without your direct feedback, or do you have to have constant control? Attorney Julie Lusthaus, partner at Einbinder Dunn & Goniea in New York and a specialist in franchise law, joins us to provide her expert view on the subject of franchising.

Questions Answered For You

The benefit to franchising a business is that enables others to operate the business basically by a turnkey business and start operating.

- Julie Lusthaus

Key Takeaways

  • Franchising can be an efficient way to expand a brand and develop additional locations throughout different geographic areas, whether locally around a franchisor’s initial stores or throughout the United States and internationally.
  • Most people when they think of franchise think about the fast food concept, however, there are also service industries, professional industries, home health care, child care, entertainment businesses etc. 
  • A franchisor would really be smart to reach out to a franchise attorney and ensure that they are going to comply with all the pre-sale requirements of offering a franchise before they start talking to people about franchising their business. 
  • Some business owners who have built a brand and are successful in operating their business and then want to expand don’t understand that becoming a franchisor is very different from operating their own business.

Read Full Interview


Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. And if you're looking to sell your company now or at some point in the future it's our mission to provide information and advice from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

And part of improving your company's value means expanding, maybe expanding into other markets, opening new locations, and for many young business owners or first time business owners who really have found some success with their companies the prospect of growing your company may seem somewhat daunting. But have you considered expanding through franchising your business or through franchise locations? Joining me for a return visit on the Morgan & Westfield guest line is Ms. Julie Lusthaus, an attorney specializing in franchise business law. She's a partner at the firm Einbinder and Dunn LLP in New York. Julie Lusthaus, it's nice to have you back on again. Thank you and welcome back to Deal Talk.

Julie: Thanks Jeff, it's great to be back.

 

Jeff: Why do you believe that some businesses seem to be more right than others for expanding through franchising?

Julie: The benefit to franchising a business is that enables others to operate the business basically by a turnkey business and start operating. And so a business that will be successful with franchising is one that can be replicated. So it should be a business where the franchisor can teach the franchisee relatively quickly how to operate the business.

 

Jeff: Are there any milestones Julie or specific financial data that you need to look for to determine a company's readiness for expanding into franchise locations?

Julie: Well, you certainly want to have a business that's profitable, successful, and growing. It's important to think about the fact that if a franchisee is going to be operating a location they're going to be paying additional fees to the franchisor that the company store is not paying. And you want to make sure that the business will be profitable for your franchisee. So it has to be generating sufficient revenues to cover the costs that would be incurred by a franchisee. And you also want to have a company that's established well enough to support the requirements for providing training and meeting other obligations to the franchisees. 

Well, you certainly want to have a business that's profitable, successful, and growing.

Jeff: That right there, you just talked about providing training and you might also suggest I suppose marketing support. And there are a lot of details that business owners really need to consider moving forward because they want to have I would think Julie, and you can chime in anywhere here, that they want to have some kind of uniform standard for operations and quality assurance for their customers and for their stores in order to help them operate successfully.

Julie: I think that's exactly right. The idea of franchising is that you could have 50 locations open and any of those locations I, the customer, am going to go in and have the same experience. So you want to make sure that the businesses are operating according to systems standard that you protect the brand and that present the brand in the way that the brand should be presented. And one of the ways that franchisors share their requirements with franchisees is go through the franchise agreement that will be executed, but also through operations manuals and other information that the franchisor will need to put together to teach their franchisees how to operate in accordance with their requirements.

 

Jeff: What are some long term advantages Julia Lusthaus to franchising of a business or expanding through franchises as oppose to simply adding locations and maintaining company owned and operated stores?

Julie: It's a great opportunity to expand the brand where the franchisee is going to invest the cost for opening and developing the unit as well as the time and effort in operating the unit. So it can be a much more efficient way to expand the brand and develop additional locations throughout different geographic areas, whether it's locally around with a franchisor initial stores are operating which is typically where franchisors will start, but certainly throughout the United States and internationally. Having the franchisee incur the cost and expend the time in developing the unit can enable units to be open much more quickly. 

It's a great opportunity to expand the brand where the franchisee is going to invest the cost for opening and developing the unit as well as the time and effort in operating the unit.

Jeff: We're talking with Julia Lusthaus. She's an attorney specializing in franchise business law at the law firm of Einbinder and Dunn LLP in New York. And you might remember if you've listened to Deal Talk in the past, we've had Julie on before talking about franchise related issues, franchise law issues, and today we're talking about things that you really need to be mindful of if you have it in mind to expand your business and you're thinking about doing it by opening franchise locations in your market or expanding outside your market. Should those people who own a business and they may be interested in expanding later on, and maybe franchising their locations or expanding through franchise, that's a goal that they have. Should they have that somewhere in their original business plan? Is this something that they really need to have in their plan at the very beginning, Julie, so that they can kind of prepare themselves and talk to all the people necessary in order to get all the answers that they need moving forward?

Julie: I don't think that's necessary Jeff. I think that it's helpful because if you know that you're going to take that approach then you can from the beginning sort of start thinking about what is required to operate and start creating an operations manual that somebody else can use to develop a location. But you certainly want to get operating first and ensure that your business is successful, and that it's really right for franchising. And that you may not know until you've already started operating.

 

Jeff: Julie, Ray Croc is looked at as kind of the original pioneer and McDonald's is the gold standard for franchise independently owned and operated business all over the country and has been around for many years as you know. And then we've seen many others kind of follow. But a lot of people think of a franchise business opportunity as only being kind of in the small retail and the fast food, quick service food space. But there are other businesses out there in other industries that really are perfectly, ideally suited to this. Just based on your experience in dealing with all the clients that you do, can you talk to us a little bit about some of those other opportunities that are out there, industries where this kind of thing is normal now and where we've seen a lot of success?

Julie: Sure. And I think Jeff you make a great point. Most people when they think of franchise, think burgers and fries, and think about the fast food concept. There are service industries, professional industries, there's home health care, and child care, and entertainment. Cleaning services, car services, there's so many different industries where franchising has really enabled brands to successfully expand. And what's really neat is that some of these industries provide kind of alternative sources of opportunities, so there may be a franchise system that provides for semi-absentee ownership by franchisees. Or franchise systems where franchisees are able to work from their home. There can be something for everybody in franchising. And successful business owners, whatever their concept, may really have an opportunity to think about expansion through franchising even if their business is not a traditional brick and mortar retail location.

 And successful business owners, whatever their concept, may really have an opportunity to think about expansion through franchising even if their business is not a traditional brick and mortar retail location.

Jeff: Julie, real quick before we go to a break. I wanted to ask you about benefits. Is it customary for the corporate parent to provide benefits for the employees, or make those available for employees down the line, or is that typically something that the independent owner-operator of a franchise location does?

Julie: If you're speaking about the employees of the franchisees, Jeff, those are going to be employees strictly of the franchisee. The franchisor is going to be interested in ensuring that a franchisee complies with system standards, uses the trademarks in a way that’s provided for by the franchisor and operates the business in accordance with the franchisor's requirements in order to protect the brand and to present the brand in the way that the franchisor wants it to be presented. But otherwise the franchisee as an independent business owner, they have control over their employees. They make choices about the hiring and firing, and scheduling of their employees. And it's very much an independent business although using the intellectual property of the franchisor to operate. 

 

Jeff: Got it. That clears that up, very good. What we're going to do when we come back, we're going to talk more to Julie Lusthaus, and we're going to talk about regulations and legislations specific to franchise businesses. Also too, we're going to talk a little bit about first steps, what you really need to do in order to get started on your way to finding out really if it's right for you. But also really, the first real steps to growth of your business through setting up franchise locations. Julie Lusthaus, she is our guest and attorney, and she's with Einbinder and Dunn LLP in New York specializing in franchise law. My name is Jeff Allen and we'll be back when Deal Talk resumes after this.


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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with my guest Julie Lusthaus, attorney and partner at Einbinder and Dunn LLP in New York and we're talking about how to expand your business, or not necessarily how to but giving you maybe some things to think about if you're considering expanding your business by opening up franchise locations and making your business available to those who are interested in owning their own business, whether it be in your neighborhood, or whether it be outside is other markets depending on what your growth mode is looking like. Julie, what I wanted to kind of try to find out from you is whether there are any really important laws that you can just kind of touch on that are really specific to franchising, some things they really have to be mindful of and they have to consider first and foremost before they get started.

Julie: Sure Jeff. The Federal Trade Commission requires that franchisors prepare certain documents before they start offering franchises for sale, it’s... to franchise disclosure documents. And it contains information about the franchise, the franchisor, the system, and it will also contain certain agreements that franchisees will be asked to execute. And several states, about 13 of them plus some others, have some similar requirements, require that the franchisor register the disclosure document with the state before it sells franchises in that state. And it's really important that a franchisor complies with these requirements before it starts selling or offering to sell franchises to ensure that the system is really set up strong and correctly from the beginning. Failing to do so can result in litigation and problems within the system, and problems with selling additional franchises. A franchisor would really be smart to reach out to a franchise attorney and ensure that they are going to comply with all the pre-sale requirements of offering a franchise before they start talking to people about franchising their business.

The franchisor is going to be interested in ensuring that a franchisee complies with system standards, uses the trademarks in a way that’s provided for by the franchisor and operates the business in accordance with the franchisor's requirements.

Jeff: There's going to be a lot of little steps that business owner's going to take or a franchisor is going to take along the way. What is the first step, Julie, that you believe that a franchisor or future franchisor - we'll go ahead and we'll call them that - needs to take in order to kind of get the ball rolling at least?

Julie: Certainly speaking with professionals, both consultants and franchise lawyers, to help them prepare the business for franchising. In addition, one of the benefits to operating a franchise is using a brand name or a trademark that is protected and that becomes known so that you have the benefit of a known brand that you're operating. And so a franchisor should certainly take steps to protect the trademark and its intellectual property before it starts franchising.

 

Jeff: Once the process gets started and you've had a chance to maybe meet with a business owner, franchisor, and the documentation is in process so they start getting that to the states or to the municipalities, the local governments where they're going to be going into and expanding, and opening new locations. How long does the process take before they can actually offer these locations for sale to independent owner operators?

Julie: That's a great question, Jeff, and some of that's going to depend on obviously how quickly the franchisor can get its information together and make decisions about the system. You know, it's not something to be done lightly or quickly. We work with clients from the beginning of the decision to start franchising. It could take a couple of months before the franchisor is in a position to actually file its documents with the state. And then once the state has the documents if that's necessary then that process could take another few weeks. So it's definitely not something that's done overnight and it's more important to really set up the system properly and appropriately for that particular franchisor client and not just jump right in, and not move so quickly that that system isn't created from the beginning in the way that makes sense for the franchisor. You really want to make sure that the franchisor thinks through the different issues that will come up in the course of the relationship with the franchisees. There's certainly a lot of detail to figure out in terms of how the franchisees will be operating and what their requirements will be. It's certainly more important I think to spend the time, the effort, and the resources frankly in setting up a system the right way from the beginning, rather than rushing to try to start franchising and sell franchises, and find yourself in a situation with a franchisee that the franchise agreement doesn't really address the issues that are going to come up during the course of the relationship. The one thing that people need to think about is when you're selling franchise is typically you're giving franchisees the opportunity to operate the business for a certain period of time which could be as much as 10 or 20 years. So there's a lot involved in trying to think about what might come up in the future and how the business may need to develop in the future and you want to make sure that the franchisor has the opportunity to enable the brand to grow within the confines of the obligations of the franchisees and the franchise agreements. There's some time involved.

And so a franchisor should certainly take steps to protect the trademark and its intellectual property before it starts franchising.

Jeff: And by the way too, before you even get to that point I think that someone who owns a business who is very, very close to what it is that they do and who has a certain way of doing things, this goes back to the top of the program really. You may not be cut out for expanding into franchise locations as a business owner if you need to have your clutches on everything that it is that you do and you're not one who's able to delegate, or let go of things and trust other people to run your business without having to constantly feel like you need to look over their shoulder at all times. This is probably not for you anyway, but it's something that I think that really, really does take careful consideration at the very start to make sure that you're comfortable with the idea of doing this. We're talking about your company's growth, and it can be kind of a personal thing to consider at the very start, and something that you need to think about. Are there certain specific issues that come to mind, Julie, that your firm encounters frequently with clients who come to you with problems? These are problems that potentially can involve some litigation down the line. But anything that's unique that you have seen in your area of specialty which is franchise law that are common occurrences among franchise businesses that really, if not for one or two things, could probably have been avoided, issues that you've faced or that you've seen your clients face?

Julie: I'd just like to touch on the point that you made before we get to this, and I think that it was a terrific point about the fact that some business owners are not going to be comfortable with allowing others to operate under their marks, their trademarks, and their brand name. And we've had experiences with clients who it became clear as we went through the process that they weren't going to be comfortable with the idea of letting others operate stores using their trade names. The other point to make about this is that we have successful business owners who have built a brand, who are successful in operating their business and then want to expand through franchising but they need to understand that becoming a franchisor is a very different business than operating the business of the company. And so for clients who just absolutely love what they’re doing in their day-to-day operation of their location or of their business, franchising may not be what they’re looking for because becoming a franchisor is so different than from the day-to-day operations of it. I think that's another factor along with the idea that they have to be willing to let others operate under their brand name when thinking about whether to franchise a business.

 

Jeff: Very good, I appreciate that follow-up because it really is an important thing that people need to think about. After all businesses can be kind of an extension really of our family when you think about it because we're so close to those ideas, the concepts, and our business in general. I'm going to go ahead and I'm going to pick it up. Let me ask you the other question again. I'll just kind of re-ask. Julie Lusthaus, your firm deals with franchise business clients I'm sure on a very regular basis. You yourself specialize in franchise law. Are there some common areas of concern or common issues that you have seen come up time and again with franchisors who come to you that face potential litigation? Whether this is something that involves customer service practices, or this is something that involves anything that may come up between them and their franchisees, anything that you're willing to share that these are the types of things that could probably be easily avoided if people were just able to get in touch with their attorney to kind of get out in front of some of these issues first?

Julie: Sure. Initially the biggest area of concern is when franchisors or wannabe franchisors delve into franchising before they're legally permitted to do so. And we've seen certainly situations where the business owner will want to sell, or he'll have a customer, or a family member, or somebody say, "Wow, this is such a great business, I want to operate one." And they sort of work out an agreement between themselves that's not intended to be a franchise. But under the laws of the FTC rule and under the laws of many states, whether you call it a license agreement, or some sort of joint venture agreement, if it's a franchise under the definition of franchise, it's a franchise. And it's very important that business owners don't start dabbling in expansion with third parties without ensuring that they're complying with the laws regarding franchising before they do that. So that's sort of when you're getting started. It's certainly important to make sure that they're legal to sell franchises. Once the relationship has developed then one of the things that we see is situations where a franchisee may not be complying with the system standards. And it's important for franchisors to really take action to protect their brand. If a franchisee is going to leave the system or is not operating in accordance with its franchise agreement, the franchisor really needs to take steps to ensure that that franchisee is no longer operating using the brand name. And these are the things that if the franchisor waits too long to take steps to protect their intellectual property or the trademark they could run into trouble later on with claims that they didn't do what they were supposed to do to protect their brand. It's very important for franchisors to stay on top of what their franchisees are doing and ensure that they're complying with their agreements. And if there is an issue, to reach out to counsel and have help trying to resolve that issue before it turns into litigation. 

The other point to make about this is that we have successful business owners who have built a brand, who are successful in operating their business and then want to expand through franchising but they need to understand that becoming a franchisor is a very different business than operating the business of the company.

Jeff: Julie, Einbinder and Dunn, your firm, are they serving clients just in the metropolitan New York area or do you have clients across the country? 

Julie: We certainly have clients, our friends have clients who are developing franchises and expanding in all parts of the country. And the nice thing is that we're able to work where necessary with local counsel to provide the services to our clients whether they're operating in New York or in other locations.

 

Jeff: If someone has some questions, they have had a chance to listen to you a couple of times on our program now and they would like to chat with you. Maybe they've got some concerns, they're just interested in getting started, or they are actually interested in a sit-down to kind of determine ways forward. What should they do? Can they reach you directly?

Julie: They can reach us directly by phone at 212-391-9500. Our website is ed-lawfirm.com, and they can certainly get more information actually about franchising and our services on our website, or reach me via email at jcl@ed-lawfirm.com.

 

Jeff: Can you give us that phone number one more time?

Julie: Sure. It's 212-391-9500.

And the nice thing is that we're able to work where necessary with local counsel to provide the services to our clients whether they're operating in New York or in other locations.

Jeff: Julia Lusthaus, once again, we thank you so much for taking time out of your schedule today and chatting with us a little bit about some things that people need to be mindful of, those business owners who may be interested in expanding their companies and offering locations as franchise locations to independent owner operators. Once again, we appreciate your time. Hopefully we can talk to you again soon.

Julie: Thanks, Jeff. It's a pleasure being here.

 

Jeff: Julie Lusthaus, attorney specializing in franchise law and partner at Einbinder and Dunn LLP in New York. 

Deal Talk has been presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts like Julie Lusthaus make sure to join us again here on Deal Talk. I'm Jeff Allen, thanks again for listening. We'll talk to you again soon.

 

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