Do you have a successful business such as a restaurant, boutique hotel, or watersports company that you have built into a replicable format? If you want to leverage your existing supply relationships, marketing methods, loyal management team, and cost structures to jumpstart new locations, then franchising might be right for you.
What does it take to franchise successfully a business that began life in the Virgin Islands or elsewhere in the Caribbean? Start by evaluating these four critical areas. If you feel that you are ready to move forward, contact an experience franchise attorney such as those at BoltNagi PC today.
- Don’t franchise unless you can devote adequate funds to the process.
Prospective franchisors’ number one mistake is starting the franchising process without devoting adequate capital and time to the process. In order to franchise properly (and legally) you will incur legal fees to prepare the franchise disclosure document (FDD) and franchise agreements. Additional legal fees can add up if you open in certain heavily regulated states like California, New York, Iowa, and others with annual registration requirements. You’ll also need to set aside funds for accounting fees, because franchisors must be audited annually. You’ll need to set aside several thousand dollars for filing fees to complete state registrations, and additional funds to set up numerous corporate entities – the LLC or single C-Corp. you have for your existing operations won’t cut it for national or international franchising. Finally, don’t forget about the marketing expenses it will take to generate initial franchise sales. Many franchisors have full-time sales teams, but you might be able to get by with a part-time staff or outsourced salespeople that regularly attend franchise or industry trade shows. How much will it realistically take? Depending on the complexity of the system and how many states you wish to sell in, count on $50,000-$150,000 to get started. It is a HUGE mistake to launch a franchise system without adequate capitalization or without proper legal advice from an experienced franchise attorney.
- Be able to show your numbers.
Businesses without a multi-year, consistently profitable track record should not sell franchises. In order to successfully sell franchises, you must be prepared to share your numbers as this is every candidate’s first question. Federal Trade Commission (FTC) and state franchise laws prohibit franchisors or their salespeople from making any representations about actual or potential sales, or the income or profits of existing franchise units, unless the information is included in your FDD. An experienced franchise law attorney can help you put together lawful financial performance representations that will entice prospective franchisees without landing you in court. If you choose to omit financial performance representations altogether, you’ll generally be missing out on the majority of potential franchisees.
- Use an experienced attorney that knows the law.
Franchising, like the sale of securities, is a highly regulated type of financial arrangement. FTC regulations and a litany of state laws restrict how and when you may sell, begin, or terminate a franchise; and many include substantive requirements for your franchise relationships. In some cases, violating these laws can result in felony jail time, and even though you operate your franchise system as a business entity, you and your management could have personal liability for certain violations. Franchising requires specific legal knowledge, so avoid general practitioners who spend some of their time defending criminal cases or personal injury matters, and select a business law attorney with expertise in franchising such as those at BoltNagi PC.
- Focus on the people.
Franchising is an entirely different game than running a hotel, restaurant, or service provider. The people who helped you succeed at your core business, including your outside services providers like attorneys, marketers, and accountants, might not be the best people to build your franchise system. You need to focus on recruiting the right people with relevant expertise in franchise sales, franchise law, franchise marketing, and franchise accounting. Assemble the right team from the outset, and don’t try to do everything yourself.
The same principle goes for selecting franchisees. Don’t necessarily choose the first ones to express interest in your brand. Be selective with prospective franchisees—ensure they have the liquid capital, time, net worth, and experience to make a franchise of your system work. Meet them in person, and ensure their geographic distance will not pose a problem while your system grows. This issue is especially key in the Caribbean, where various languages and cultural impediments may make franchise expansion more problematic than elsewhere.