New York Franchise Law Blog : Franchise Lawyer & Attorney Charles N. Internicola, Providing National Representation of Franchisees and Franchisors

In the face of a recession has come a renewed interest and focus on franchising and franchise opportunities. Faced with the uncertainty of "corporate life" and layoffs rendering hard working and educated individuals without employment, a spotlight has been placed on franchise ownership and the resources available to prospective franchisees.

So what do We Learn From Viewing Franchising through the Prism of a Recession?

• No Business is Recession Proof - Including a Franchise: In her timely and informative article "When Career Turns Down, Franchising is Option" career columnist Eve Tahmincioglu correctly recognizes that purchasing a franchise is definitely an option that "out-of-work individuals with money" should consider.  However, Ms. Tahmincioglu cites to Small Business Administration statistics and cautions would be franchisees that a franchise business (like any business) is not recession proof.  So what does this mean?  Nothing is guaranteed and do lots of research - explained in the next point below.

• Selecting the Right Franchise Requires Research: In an earlier post I urge (strongly) that before you purchase a franchise contact existing franchisees and ask them about their experiences.  This point is critical, however, in terms of the "information gathering process", the internet has helped franchise purchasers level the playing field.  In his article "Blogs Provide Insight to Would Be Franchisees" Wall Street Journal columnist Richard Gibson provides prospective franchisees with critical advice and, most significantly, an analysis of Blogs that offer business purchasers with great information and advice . So if you are considering the purchase of a business or franchise read Richard Gibson's article and check out the blogs, which include:

Blue Maumau, Franchise Pundit, Franchise Chat, Rush on Business, Unhappy Franchisee.  Other great franchise blogs include: The Franchise King, Franchise Pick, Franchise Essentials.

•  If You are Buying a Franchise "Only" because You Lost Your Job - Don't Do It: With the many rewards that come with entrepreneurship and owning your own business or franchise come many difficult questions, obligations and choices.  While your current employment status (or lack thereof) may be "one of many" valid reasons to buy a franchise it should not be the only reason - otherwise, you may make a bad situation worse. In my article "Can (or even Should)  you Buy a Business or Franchise to Replace a Lost Job?" I have attempted to address this issue and identify some of the additional factors that should be considered.

Although the "current" economic climate is difficult, there are, nevertheless, many opportunities for those looking to make a leap into the world of entrepreneurship.  However, before doing this, take advantage of the valuable information offered on the web by the franchise and business community.

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KENNETH A. GOSS is a guest contributor to the New York Franchise Law Blog and has been engaged in the private practice of law since 2000. He currently serves as Senior Counsel to the franchisor of a leading specialty food concept, which has more than a thousand retail stores located throughout the United States and in at least eleven countries worldwide. During his time in-house, from 2006 to the present, Mr. Goss provides advice and counseling to the corporation on all legal matters in relation to the franchise system including, for example, franchise registration and disclosure matters, franchise transactions, international transactions, litigation matters, and the negotiation of product licensing, strategic alliance, media, marketing, supplier and technology contracts.

Prior to that, Mr. Goss was engaged in a transactional business law and commercial litigation practice counseling startup and established clients on a broad range of corporate, commercial and business law matters. His experience includes, for example, establishing franchise systems from the structuring of business entities though to the registration of the franchise disclosure document. His experience also includes assisting in the resolution of franchise disputes, such as termination, statutory compliance and fraud cases, through mediation, arbitration and litigation.

Mr. Goss is a member of both the Connecticut and New York Bars and is admitted to practice before the U. S. District Court, District of Connecticut, the U.S. District Court for the Southern District of New York and the U.S. District Court for the Eastern District of New York. Mr. Goss holds a Juris Doctor degree from Quinnipiac University School of Law, a Master of Business Administration degree from Quinnipiac University School of Business and a Bachelor of Arts degree from Fairleigh Dickinson University. Mr. Goss resides in Connecticut with his wife. Mr. Goss can be reached by email at kennethagoss@hotmail.com.

Articles by Kenneth A. Goss, Esq.

• Franchise Supply Programs: Maximizing Payments to Franchisors and Minimizing Risk
• Retail Franchises: New Consumer Protection Developments In California
• Franchise System Marketing Factors to Consider when Structuring a Sweepstakes
• Franchisors: Where do 'Franchisee Associations' get the Right to Sue and How to Challenge this "Right"
• International Franchising - What US Franchisors Need to Know before Expanding Abroad (Part I)
• International Franchising - What US Franchisors Need to Know before Expanding Abroad (Part II)

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If you are a successful business owner and entrepreneur, chances are that you have considered or, at least, thought about expanding your business through the establishment of a franchise system. That is, taking the trademark(s), services and business systems that you have created and licensing them to third parties (franchisees) who will then devote their own time and capital to expanding your business concept and, hopefully, benefit from the experience and success that you have achieved to date.  No doubt, franchising is a popular and extraordinary vehicle (when done correctly) to achieve the multi-unit expansion of a business.  However, the franchising is not right for every business or entrepreneur.  Before "starting a franchise", consider the following 4 questions to evaluate if franchising is right for your business:

• Franchise Question No. 1 - "Do you have Business Systems?"  

Franchising is all about duplication, consistency and uniformity.  That is, recreating, in each store / each franchisee's business, the unique qualities and customer experience that has made your business a success.  To recreate this success and franchise your business you cannot leave anything to chance and you must be able to identify, articulate, teach and recreate the "business systems" that "you" use to successfully operate your business. For example, the "business systems" that I am referring to will include your methods and procedures for (a) operating the business, (b) addressing and responding to customers/clients, (c) advertising, (d) preparing products or delivering services, (e) managing staff and (f) administration.  There are more and these "systems" will vary from business to business.  The good thing is that, as a successful business owner, deep down if you take an objective look at the things you do every day in operating your business, identifying your "systems" should be a straight forward task. But keep in mind that you must be able to quantify these systems (i.e., write them down), simplify them and teach them to your future franchisees.

• Franchise Question No. 2 - "Can your Systems be Taught to Franchisees?"

Once you have identified your "systems" (See, Franchise Question No. 1) the next question is whether or not your "systems" may be taught to franchisees and carried out by them consistently on a day-to-day basis.  Consistency is key and to establish a successful franchise your "systems" must be capable of duplication by your franchisees - to do this, your systems cannot be complex and must be "boiled down" to a set formula.  If your business "systems" are extremely complex (a) your business may not be an appropriate model for franchising or (b) your franchise may require extremely experienced franchisees with industry experience similar to yours. 

• Franchise Question No. 3 - "Do you Have a Strong and Protectable Trademark?"

One of the primary and core elements of a franchise and franchise system is its trademark(s). As a "franchisor" one of the primary assets that you will be licensing to your "franchisee(s)" is the right to use your Trademark(s).  So you need to make sure that your trademarks are unique to your business and be capable of obtaining legal protection - that is your trademark cannot be a generic term, cannot be a name that is currently used by others and must be capable of registration with the United States Patent and Trademark Office. For a more detailed discussion of the importance of trademarks to a franchise, check out "Trademarks Matter: Evaluate your Trademarks Often and Early Before Starting a Franchise."

• Franchise Question No. 4 - "Will your Business be Profitable for Franchisees?"

Right now I am certain that you can pinpoint the profits of "your business" on a monthly, if not weekly or daily basis.  To franchise your business you must first ensure that (a) your own business possesses a consistent track record of profitability and growth and (b) that your franchisees (if they follow your "systems") will possess the opportunity for profitable growth. When making this "profitability analysis", unlike your own business, you must take into account (i) the royalties that the franchisee will be paying to you on a weekly or monthly basis, (ii) the fact that the franchisee may have higher operating costs than your established business, and (iii) the franchisee may be servicing debt obligations used to establish its business.

For additional and insightful information on this topic check out Demir Barlas' article "How to Franchise Your Small Business" and Joel Libava's article "Does it Shout "Franchise Me!"?".  For a franchisees perspective as to what makes a good franchise system Sean Kelly's article "10 Criteria for Assessing a Franchise" provides some excellent insight.

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If you are a successful business owner and thinking about franchising your business, it is critical to recognize that with the benefits of franchised expansion come both federal and state regulation - regulation that is manageable and, actually, helpful if approached correctly.  While Federal Law provides an overriding framework regulating the offer and sale of franchises throughout the entire country, fifteen states have enacted their own franchise laws that, supplement and add additional regulations to be followed by franchisors. In Twelve of the states, registration of the franchisors Franchise Disclosure Document (FDD) is required. 

States that have Enacted Supplemental Franchise Laws and Require Registration of a Franchise Disclosure Document:

• California
• Hawaii
• Illinois
• Indiana
• Maryland
• Minnesota
• New York
• North Dakota
• Oregon
• Rhode Island
• South Dakota
• Virginia
• Washington
• Wisconsin

In these states, in addition to complying with the Federal Franchise Rule, franchisors must file and register their franchise disclosure document (FDD) prior to offering or selling a franchise.  Like a stock or security that must be registered with the Securities and Exchange Commission before offering or selling a franchise in these "registration states" your FDD must first be registered with the appointed state regulator.  For example in New York, FDD's must be registered with the New York Attorney General.  In California FDD's must be registered with the California Department of Corporations.  Since New Jersey is not  registration state, although FDD's are still required and must be disclosed, they are not registered with a state entity.

States that have Enacted Supplemental Franchise Laws but do not Require Registration of a Franchise Disclosure Document:

• Michigan (only notice)
• Oregon (no filing)

In these states there are supplemental regulations (in addition to the federal regulations that apply throughout the entire United States) that must be followed. Although Michigan and Oregon do not require "registration" of a franchisor's FDD, these state require the filing of a notice with each respective state advising of your proposed offer and sale of franchise.

Always remember that the "state" regulations are a supplement to the Federal Rule and that, at all times prior to offering and selling a franchise you must have a prepared and updated FDD. Your FDD must be disclosed and delivered to your prospective franchisee at least 14 calendar-days before the prospective franchisee (i) signs a binding agreement with you, or (ii) makes any payment to you or any affiliated entity or person.  If you are considering a "licensing system" as opposed to a "franchise system", check out "The Unintentional Franchisor: How a License Agreement may Subject you to Franchise regulation". For important information and insight into the new Franchise Rule and the FDD disclosure requirements definitely read attorney Rush Nigut's post on the New Franchise Disclosure Document. 

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With the reality of layoffs unfortunately accelerating, "interest" in entrepreneurship is growing. Many hard working and educated individuals are asking the question: “should I replace my lost job with my own business or franchise". This is a critical question and yesterday I received an email (from an individual ordering a copy of my book "An Entrepreneurs Guide to Purchasing a Business") that emphasized the consequences of this question and the need to get the answer right. The following is the text of the email:

Thank you. I was laid off from [____] Financial Services 14 months ago. I am [__] and a senior I.T. project manager and cannot even get an interview - much less a job. I do not see any alternative to going completely broke other than to buy some sort of business. I look forward to receiving the book from you.

Regards,  R___

(Name, former employer and age removed to preserve privacy.  At present, for clients and readers of this site, you can receive a free copy of the book)

So, should purchasing a business be viewed as a solution to a layoff?

Unfortunately, the answer to this question is both "yes" and "no". “Yes” because small business and entrepreneurship, unequivocally, has been and will continue to serve as the financial life blood for millions of hard working individuals and families. “No” because entrepreneurship and small business is not right for everyone and unemployment, by itself, should not be the deciding factor. Not every small business is profitable and before you commit to buying a business or franchise, consider some the following questions:

• Do you possess sufficient savings, capital and/or loans necessary to:

(a) purchase the business;

(b) fund the initial day-to-day operations of the business - keep in mind that it may take a number of months before your business generates "profits";

(c) cover your "personal" expenses and obligations until the business starts generating "profits"

• Do you have the support of your Spouse and Family - as the owner of a small business you will be assuming a level of risk and commitment extremely different from that of an "employee". Your investment in a business will affect the financial stability of your family for many years to come.  

• Are you ready to "wear many different hats" - as the owner of a small business, different from being a specialized employee of a large corporation, you will be responsible for everything.

While entrepreneurship may be the right course of action and response to a layoff, your decision to take this step must be based on factors that go beyond your employment status and include an evaluation of your  financial resources, family support and individual skills.  For additional insight and information to assist you with this analysis, check out "So you Want to be an Entrepreneur" by Kelly Spors, "Downsized? Franchise vs. Corporate Employment" by Joel Libava, and my earlier post "From the Corporate Frying Pan into the Franchise Fire".

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