August 16, 2017
As a franchise lawyer, I see the incredible value for business owners to take a proven business model and rapidly expand through franchising. It also builds in revenue streams and places dedicated individuals at the helm of each individual franchise unit.
Yet, despite the benefits, franchising isn’t a fit for every business model out there. Additionally, some owners would prefer to stay in their current position as opposed to moving to the director of an entire franchise operation. Fundamentally, running a business and operating and growing a franchise brand are two drastically different roles.
So what options does that leave business owners detouring from the franchise route? Depending on your business, you have several options.
For brick-and-mortar businesses, the first option is to expand to additional locations yourself. The immediate upside is that you control all the moving pieces, reaping all the financial rewards of a successful business. You can use components of a franchise as you grow, such as formalizing a trade dress and building brand recognition in your trademark.
Starbucks, for instance, successfully captures the essence of a franchise, such as a standardized menu and similar look and feel around the world, yet they are all corporate locations. As their business continues to thrive, the corporation enjoys a better rate of return compared to the 5-6% in royalties that a franchise would enjoy.
Some of the downsides are you are using your own capital to grow and expand brand along with having all the financial risk regarding leases, employees etc. This option tends to work better for companies with deep pockets.
If you don’t have the funds to do it alone, but eager to expand your corporate locations, then another option is to bring in investors. You bring the business model and value of the recognizable trademark to the table while the other partners help finance the startup costs. In essence, you are building out partnerships, which means that you will need to clearly outline roles, responsibilities, expectations, and an in depth Buy-Sell Agreement.
I caution business owners to limit this option to a very select few locations. It’s not a strong model for sustainable growth. The benefit of owning your own location outright or bringing in franchisees is that you can terminate bad operators. When you bring in additional stakeholders, they own stake in your company. Too often disputes end up in litigation. The more investors you bring to the table times more locations, the more likelihood disputes will arise. Remember, a business partner breakup can be as costly, or more so, than a divorce.
As the old adage says, you don’t want too many cooks in the kitchen.
Another avenue to explore is licensing. This lower cost entry point mimics several aspects of a franchise, which makes it appealing. You build brand equity in your name. Then someone pays a licensing fee to be able to use it.
The caveat is that you no longer control the goodwill of brand. Your ability to control their actions is limited. While not impossible to navigate, it is fraught with risk. You will not be able to restrict what they sell or offer which may look radically different than your locations.
Be careful to not cross the fine line between licensing and franchising. Doing so would put you as a de facto franchisor, which means you’re operating illegally and worrisome legal and financial consequences are on the horizon. Make sure you understand the fundamental differences between licensing and franchising, as well as which business models are better suited to the licensing model.
At the end of the day, only certain businesses make sense for the licensing model. Most of the time, you see software companies license their products. Once the user pays the fee, the software company has no control over how the licensee uses their product. The beauty of the software model is that one user does not tarnish the company’s name because the value is in the software.
Formally called a business opportunity, I like to think of this model as a business in a box. You develop and prove a business concept, such as a sign shop in San Diego. Someone in a different area, such as Los Angeles, wants to open a sign shop. They purchase a business opportunity from you, in which they will get a specific territory, and purchase all the necessary equipment, and training on how to run a sign shop for a fixed price.
What’s not included is your trademarked name. They will need to open their sign shop under a completely different name. This, and the absence of royalties, is the main difference between a franchise and the business opportunity model. The new shop will operate independently. Once you complete the training and supply all the necessary equipment, your job is done, and you move on to working with the next prospect.
This is more of a one-off transaction as opposed to a reoccurring revenue model that franchising provides.
As you can see, if you have a proven business model or a solid product, there are different avenues to monetize your business model. The key to whichever route you go is to ensure you have a strong legal foundation to grow on. This is particularly true with licensing, as a de facto franchisor comes with serious consequences down the road.
If you’re looking to take your business to the next level, or are simply determining which option makes the most sense for your business, both financially and legally, then it’s time for us to connect. As an experienced business lawyer, I can help you examine the route that makes the most sense for you and ensure that legally you are protected as you move forward.