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

Short Answer:  Avoid lawsuits.  That is, work on and establish with your legal counsel "legal systems and procedures" that is designed to avoid unnecessary litigation. (Slightly longer answer follows)

While the advice that I am offering here may sound obvious and, possibly, even a little self-serving, it is nevertheless an honest and critical point that far too many franchisors and business owners overlook.  That is, in most (but not all) litigation once your are involved (either as a plaintiff or defendant) the advantages and benefits that may or may not stem from the outcome of the litigation will, many times, be outweighed by:

(a) the legal fees that you will incur,

(b) lost productivity associated with your focus on the lawsuit (as opposed to building your franchise systems), and

(c) the uncertainty that is inherent in all litigation - no matter how strong your case is.  

Faced with the inherent costs in all litigation, the best course of action for both start-up and established franchisors is to establish with your legal counsel open channels of communication focused on cutting-down and mitigating your "litigation exposure".  That is, in addition to the critically important task of managing your regulatory requirements and disclosures as a franchisor, you must discuss and establish with your legal counsel a fair and flexible relationship and system focused on the management and monitoring of your day-to-day legal activities. Some of these activities should include:

(a) The review of vendor agreements,

(b) The establishment of standardized franchisee communications and compliance notices;

(c) The quarterly evaluation and review of your trademarks and the filing of supplemental trademark applications and affidavits;

(d) The establishment and maintenance of a specified and well documented "encroachment policy" respecting the grant of additional franchises;

(e) The establishment of a clear and concise policy respecting the negotiated modification of your franchise agreements;

(f) The maintenance of strategic employment agreements with your key employees that are focused on the implementation "enforceable" restrictive covenants;

While establishing an on-going day-to-day working relationship with your legal counsel may be more expensive than "doing nothing", the value of this planning process will far outweigh the cost associated with unnecessary and avoidable litigation. Once tasks become standardized and well establish, my experience has been than many activities may be incorporated into the tasks of your "in-house" staff and, over time, serve to reduce your long-term legal fees.

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Part of the “Franchisor Basics” Series

Under the Federal Franchise Rule franchisors are required to disclose their “Financial Statements” in Item 21 of the Franchise Disclosure Document. All financial statements must be prepared in accordance with Generally Accepted Accounting Principals ("GAAP") and in all but an extremely limited number of situations involving a start-up franchisor, a franchisor’s financial statements must be “audited”.   In the franchise regulations (16 CFR Parts 436 and 437) FTC provides detailed information respecting a franchisor's "Item 21" disclosure requirements, including:

•  Financial statements must be audited by an independent certified public accountant and prepared in accordance with GAAP;

• Financial statements must be prepared in a "tabular" format providing for a comparison between current and prior fiscal years; and 

• Financial statements must include (a) Balance Sheet for the prior two (2) fiscal years and (b) Statement of Operations, Stockholders Equity and Cash Flows for each of the franchisor's prior three (3) fiscal years. 

Other provisions apply for "start-up" franchisors (a topic that will be discussed in future posts) and the disclosure of the financial statements of a franchisor's "affiliates". 

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For the successful business owner considering the franchised expansion of his or her business one critical question that must be answered is "how do you approach the preparation and development of your franchise agreement."  That is, do you "approach" the preparation and development of your franchise agreement (and franchise disclosure documents) as:

(a) A "legal obstacle" that requires the preparation of "generic" agreements and disclosure documents;

OR

(b) A collaborative process focused on the development of a critical "asset" that uniquely reflects, identifies and protects the components of your business (that is what has made your business successful),  franchise, and  franchise system.  

Why do I ask?  Because your approach will determine the ultimate outcome of this important process.  

Approach "(a)" - the "legal obstacle approach" will typically lead to generic  agreements and disclosure documents that, by all accounts, result in little (if any) value to a developing franchise system.  While this approach may satisfy (or appear to satisfy) your regulatory disclosure requirements they do nothing to advance the development of your "franchise system".  That is, approach "(a)" typically leads to "form over substance" and not much else.  When speaking with start-up franchisors that have followed this approach - an approach that they followed with the best of intentions but based on what may be poor advice - I am typically advised that their franchise agreements simply do not work for their business and franchise system.   

For the start-up franchisor, approach "(b)" is the only true option.  By following this approach your franchise agreement and disclosure documents will serve as core business "assets: that will reflect and protect  the unique and critical components of your business and your newly established franchise system.  

When starting a franchise keep in mind that all agreements are not the same and and that your input will be critical to insuring that your agreements and disclosure documensts reflect the unique nature of your business.  This is no easy task and is not one that is not simply delegated - an indepth working relationship with your franchise lawyer is required.

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Recently I received some interesting and insightful comments from an  individual commenting on issues involving franchisee rights.  Her main point of contention appears to be the disparity of bargaining power and legal rights between franchisors and franchisees.  While this is certainly an issue of concern, I believe that her comments may be giving a "free pass" to franchisees who don't take the time to conduct the appropriate pre-purchase franchise due diligence.  The following are some of the commentators insightful points:

On Franchise Agreement Liquidated Damages:

Isn't it true that most franchisees don't understand that the "optional" liquidated damages terms in the contract are premeditated to give the franchisor the advantage when the franchisee fails to thrive? The failure fee is hidden within the contract from the view of franchisees.

Do attorneys point this "failure fee" out to their clients?

My Take on this Serious Issue:  As I have previously discussed, "liquidated damage" provisions in franchise agreements - especially those that kick-in when a franchisee "closes his or her doors" have the potential to inflict serious financial harm on a franchisee who already may have lost a substantial investment.  However, these provisions may be negotiated by franchise attorneys and are exactly the types of "legal issues" that a franchisee should be discussing with a franchise attorney before signing a franchise agreement. Liquidated damage clauses can be negotiated.

On Franchisees Reading and Negotiating their Franchise Agreement:

While it may be true that franchise agreements may be legally negotiated with the franchisor by individual prospective franchisees, isn't it true that most of the mature franchisors don't or won't negotiate changes and will acknowledge that pre-sale, their contracts are not negotiable. Don't they acknowledge this to the courts, when asked?

My Take on this Serious Issue: Franchise agreements are negotiable and even "mature" franchisors are willing to make reasonable modifications.  However, even if we assume that a particular franchisor will not make changes why would a prospective franchisee invest his or her livelihood in a franchise and sign a franchise agreement without first reviewing, understanding and evaluating each and every right and obligation contained in the franchise agreement.  Look,  there are many times where I believe that franchisees need an advocate but franchisees cannot  get a "free pass" when they neglect to conduct even the most basic due diligence.  

In the end, you do not have to sign a franchise agreement and, sometimes, even with successful franchise systems, not signing the agreement might be the best course of action for you. No one is forcing you to sign the agreement.  Likewise you must know that no matter how many other franchisees may have signed the franchise agreement you - personally - must understand and evaluate what you are signing.  Your livelihood depends on it.

For franchisors, a policy that permits limited but targeted franchise agreement modifications may actually strengthen the enforceability of your franchise agreements when faced with litigation. 

My thanks to Ms. Cross for some really insightful comments.

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Recently, in my article "Avoid the Hype when Buying a Franchise: Focus on Specifics and Not Overall Industry Trends"  I discussed what I believe to be the improper and harmful methods for promoting franchise sales, i.e.,  generic statements and promises that may lead to inaccurate and unrealistic expectations by a franchisee.  These statements are bad for both franchisors and franchisees and my advice, basically, was to disregard and avoid this type of promotion.

This afternoon after speaking with a client about a franchise that he was evaluating - a franchise that he explained would provide him with a great "return" -  I took a look at the franchisor's website and, there it was, the pitch:

[_________________] is a proven franchise system with low start-up costs and high returns.

While I readily admit that I am a franchise lawyer and not an accountant, if I were a prospective franchisee or even legal counsel to the franchisor making this pitch, I would have the following questions:

• How High of a Return?  2%,  5%, 10%...?;

• A "Return" Based on What? Start-up costs, overall investment?  

• Is the Return Measured / Based on Gross Sales or Net Income? Before Royalties or after Royalties? Before debt service or after debt service? and;

• What type of return should I expect?

The reality is that this franchisor probably does not (and cannot - without subjecting itself to potential litigation exposure) offer an answer to these questions and even if it did there would (I hope) be an extensive number of disclaimers.  For the prospective franchisee recognize that franchisors cannot guarantee success (that is not their job), so before you make an investment decision based on "vague" statements about "profits" and "returns", start asking questions.

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Driving into the office this morning I listened to a radio commercial that I found to be repulsive . The commercial was not political, did not contain any profane language and, quite possibly, did not contain any false statements.  Nevertheless, the information conveyed in this commercial (really just a bunch of self-serving platitudes) could do harm to the unprepared.  

So what was this commercial about?  The sale of franchises for a national mall based / strip-center consumer video game franchise.  You see, the commercial was not promoting the operations of their retail stores or franchisee operations but rather the sale of "franchise opportunities".  Since I don't have the actual text of the commercial (I am basing this post on my memory of 5 minutes ago) I will not disclose the name of the franchise.

What Do I think is So Wrong about this Commercial? the fact that rather than promoting existing franchisee sales and informing consumers about the advantages of their stores (compared to competitors) they offered a generic pitch about buying their franchise.  Their "franchise sales" pitch followed the following formula:

• Make a generic statement about "becomming your own boss";
• Offer generic information about  "industry growth trends"; and
• Imply, with even more generic information, that you - as a franchisee - can benefit from this opportunity by utilizing their "proven and powerful" systems.

Basically, alot of hype and platitudes - many words but little, if any, information.  

Points for Prospective Franchisees: (1) Just buying a franchise does not make you your own boss; (2) Just because an overall "industry" is growing and profitable does not mean that as a "retail franchisee" your business will also be profitable; (3) Before buying a franchise give serious thought about what makes them "unique" and the "added value" that they bring to the table.  Most importantly, when you hear a franchisor brag about "proven and powerful systems" ask specific questions about those "systems" and what makes them "proven" and "powerful".  Don't wait until after you pay a franchise fee and invest in build-out.

Some of the many internet resources to consider include: The Franchise King, Franchise Essentials, Blue MauMau, Franchise Pick, WSJ Small Business. 

Points for Franchisors:  Advertising franchise sales is no a bad thing and, in fact, may be a key component to overall system development and growth. However, the ads should be based on the unique and fundamental characteristics of your particular system and the advantages that you offer.  If these "unique characteristics" are not readily identifiable then you are doing something wrong and you should be focusing on true "system development" and not unit sales.  Significantly, the witnessed success of existing franchisees is the best source of growth for a franchise system.

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If you are considering the purchase of a franchise it is critical to recognize that your "investment" goes beyond - well beyond - initial franchise fees and startup expenses. While franchise fees and start-up expenses (such as equipment purchases and "build-out") are critical expenses that must be evaluated, they only tell half the story.  That is, when signing a franchise agreement you will be committing yourself to a serious of legal obligations that will involve the commitment of your time, future financial resources and legal obligations for many years to come.  

So when evaluating the "cost" of a franchise, in addition to franchise fees and initial start-up costs, give some serious consideration to:

(a) Reserve Capital. Additional funds that you may be required to invest in your business/franchise during periods of unprofitability and negative cash flow.  As with any business you may very well encounter periods of unprofitability and losses.  When faced with losses and cash flow shortages you will be required to invest additional assets and resources to sustain the operations of your franchise;

(b) Your Time. The extensive time that your will be devoting to operating and managing your new franchise.  Your time is valuable and when operating your franchise you will be foregoing income and opportunities from other sources of employment.  Although obvious, this expense / opportunity cost is commonly overlooked. If your franchised business does not work out remember that your losses include missed opportunity costs and income that you would have otherwise earned. 

(c) Post-Termination Restrictive Covenants and Fees. As a franchisee in most instances you will be committing yourself to long-term obligations and restrictive covenants.  These covenants and obligations have a cost, especially when they restrict what you can and cannot do if you elect to shut down your franchise.   This is of special concern to current business owners with established reputations within a community who - for legitimate reasons - decide to become a franchisee of a national company.  

For Example - If you are a carpenter with a long established reputation within a community and you elect to purchase and become a franchisee of a national "repair" or "handyman" franchise what happens if your franchise relationship does not work out and you cancel your franchise agreement?  Will you be precluded from operating your own repair business - a business that you operated many years before becoming a franchisee?  The answer is that it all depends on the restrictive covenants contained in your franchise agreement - covenants and obligations that you should review and discuss in detail with your franchise lawyer "before" signing a franchise agreement.

So when considering the "cost" of your franchise investment you must go beyond "out of pocket" expenses and fees and evaluate the substantive impact of the long-term legal obligations that you will be committing to.

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The typical franchise agreement is representative of the disproportionate bargaining power between the franchisor and franchisee.  That is, franchise agreements favor franchisors.  One such favorable clause contained in franchise and license agreements relates to "liquidated damages".

The typical franchise agreement will contain a "liquidated damages" provision whereby the franchisee agrees to pay, as damages, a fixed sum or a sum based on a fixed formula in the event of a court's finding of a breach of the franchise agreement.  If the franchisor is successful in a lawsuit against a franchisee, the liquidated damages provision may clear a path for a Court (without any further detailed inquiry) to award substantial monetary damages.  Similarly, when dealing with trademark license agreements, licensees may be subject to severe damages based on the liquidated damages clause contained in the license agreement.

Although presumptively valid in most jurisdictions, the enforcement of liquidated damage clauses is not universal and courts in states such as New York and New Jersey will make an inquiry as to the "reasonableness" of the liquidated damages and the "bargaining power" between the parties at the time of contracting. 

So what do franchisors, franchisees and licensees need to know:

• Franchisors:  For franchisors, liquidated damage provisions are critical components to your franchise agreement and serve as a significant tool when faced with franchisee litigation. When drafting liquidated damages into your franchise agreement insure that the method of calculating damages is not arbitrary, based on tangible factors and is not inconsistent with your royalty structure.  

• Franchisees: recognize that a possible "liquidated damage" clause in your franchise agreement may expose you to substantial liability should the franchisor prevail.  When negotiating your franchise agreement discuss the liquidated damage clauses with your franchise lawyer and try to cap your financial obligations and the accrual of royalties and other fees after any alleged event of default and the termination of the franchise agreement.

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If you are researching the benefits of franchising, buying a franchise or starting a franchise, chances are that you have come across articles and promotional materials discussing the benefits of a "proven franchise system".  That is, prospective franchisees are advised that if they become a franchisee of  a particular franchise they will benefit from a "proven system".  While this vague term is used often and claimed by almost all franchisors, not every franchisor possesses legitimate systems and not every franchise system is "proven".

So, what is a "proven franchise system"?  While this question is subject to a broad range of interpretation, the following is some fundamental information about "systems" and "franchise systems" that must be considered by prospective franchisees and franchisors:

• "Systems" - are simply the procedures and tasks undertaken by business owners and managers in connection with the day-to-day operations of a business.  Every aspect of a business including, advertising, financial controls, production of goods, employee management and customer service can all be boiled down to a set of procedures and "systems".  Not every business is successful and not every "system" is effective or beneficial.

• Franchise Systems - are the procedures and tasks itemized and detailed by a franchisor (typically disclosed and detailed in the franchisor's operations manual) in connection with the operation of a franchised business.  A franchisors business systems typically include tasks and procedures focused on (a) Marketing, (b) Customer Service, (c) Employee Training, (d) Production of products and (e) Methods for delivering services.

• Proven Franchise Systems - Are the "franchise systems" that have been "previously" implemented (presumably by the franchisor and other franchisees) and have been demonstrated to result in successful and profitable operations of the franchised business.

Considerations for Prospective Franchisees:  

Effective and legitimate "systems" are critical for the successful operation of a franchised business. Don't just assume that a franchisor's "systems" are "proven" or "effective".  Ask the franchisor's representatives detailed questions about what makes their "systems" unique, effective and profitable and recognize that the "proven" nature of a start-up franchisor's "systems, in most cases, may be extremely limited.

Considerations for Prospective Franchisors:

Successful franchise systems depend on successful franchisees.  The mere act of preparing franchise disclosure documents and registering disclosure documents does not create a franchise. Strong franchises require thought out and tested business "systems" and procedures that have been tested and proven successful.  During the start-up franchising stage controlled growth (with limited franchise sales) may be necessary to will permit the necessary monitoring and refinement of your business systems. 

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For the first time franchise or business purchaser "due diligence" is critical.  Although the term "due diligence" may sound odd or out of place, it simply refers to the "pre-purchase / pre-investment investigation" that you undertake before signing a franchise agreement  or business purchase agreement.  In his article "What is Due Diligence in Business Acquisitions" Ney Grant provides an excellent overview of this process.  In my book I describe a purchasers "due diligence" obligations, as follows:

A prospective purchaser must approach "due diligence" as a constant and continuing information gathering and evaluation process respecting each and every aspect of the prospective business and the business purchase transaction.

As the prospective purchaser of a franchise "due diligence" investigation should not be viewed as a mere formality but rather an important "life line" standing between you and the possibility of making a bad decision.  Keep in mind that that a good decision and a good due diligence evaluation may lead you to the conclusion that the franchise that you believed to be "perfect" and a "great opportunity" may not be right for you. Unfortunately the decision is not an easy one to make and, as a franchise lawyer, I advise my clients that you must check your emotion at the door and be prepared, if necessary, to "walk away from a deal".  From my clients perspective sometimes the best deals are the ones that never happen.

As a future entrepreneur there will be many opportunities available to you - take your time and make sure that you select the one that fits you and offers you an opportunity for success. If you are considering the purchase of a franchise and considering the steps that should be undertaken in the "due diligence" process, I strongly recommend that you review our due diligence articles.

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Recently I came across an article written by an attorney discussing the benefits of buying a franchise in the current economic climate.  The assertion raised in the article (an assertion that I completely disagree with) was that now is a good time to invest in a franchise because "in today's economic climate many franchisor's are willing to negotiate and discount their franchise fee".

If you are buying a franchise because of a "discounted franchise fee" you are making a mistake - a big mistake.  Why? the decision to purchase and invest in a franchise requires a  detailed evaluation of the franchisor and the quality of the franchise system.  "Discounted" franchise fees or a franchisor's willingness to negotiate its franchise fee should not be viewed as an "incentive" to purchase a franchise but rather a "red flag" to question the franchisor's  commitment to the long term stability of its franchise system.  Franchise fees represent a significant source of short-term revenue for franchisors.  As a franchise system expands adding "discounted franchisees" a franchisors ability to support its expanding franchise base and business systems may be severely diluted.  

In today's economic climate dedicated franchisors focused on the long-term success of its franchisees should not be focused on short-term revenues (generated through the sale of discounted franchises) but rather the continuing development of quality training programs and business systems.  Discounted franchise fees are typically accompanied by the addition of unqualified franchisees and the dilution of the overall franchise system.

So if you are considering the purchase of a franchise don't be swayed by any alleged discounts or bargains.  Focus on a due diligence process that places an emphasis on a franchisor's commitment to its "business systems" and the overall profitability of its franchisees.  Keep in mind that your overall "franchise investment" goes well beyond an initial franchise fee.

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Every once and a while I get comments to posts on this blog that I refuse to publish.  These are not comments that are critical of my posts  (frankly, I appreciate critical comments that offer informative and different viewpoints) but rather generalized comments by individuals who are just looking to attract attention to a franchise or business opportunity that he or she is attempting to sell.  What bothers me the most is that these "comments" almost always involve an erroneous (and almost fraudulent) sales pitch where the prospective business purchaser or franchisee is "advised", basically, that franchises don't fail.  These improper and erroneous sales pitches, incorporate the following theme:

During tough economic times you should buy a ______________ franchise because the chances for failure are much lower with a _________ franchise than starting a business from scratch because you will benefit from a proven system.

While there are many benefits to franchising (benefits that I value and believe in) the reality is that, like any business, franchises do fail and that not every franchise opportunity is the same.  That is, there are many franchisors that possess neither a proven track record nor a tested business model. The key for the prospective business purchaser and franchisee is to find the right business model for you and, when purchasing a franchise, to be selective and find the right franchisor, that is a franchisor with a tested and well established model.  Good franchisor's are out there but you must do your research, speak with qualified franchise advisors (they are out there) and consult with a franchise lawyer to review the FDD and other information before you signing any agreement or pay any money.

The information is out there, but you must be an "active" purchaser and discount sales pitches that "guarantee success".  In business there are no guarantees.

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The purchase of a franchise represents a substantial investment that will have longstanding implications for both you and your family.  Prior to selecting a franchise and deciding to move forward, you must engage in an active "due diligence" evaluation of the franchise system and determine if its is right for you.  As discussed in "Contact Existing Franchisees before Signing a Franchise Agreement" existing franchisees are excellent sources of information when evaluating a potential franchise investment.  Three "initial" questions that you should be asking existing franchisees, include:

1.  Were you Satisfied with the Franchisor's "Pre-Opening" Training and Support?  One of the advantages of purchasing a franchise, in theory, should be the support and training provided by the franchisor.  The training and support that you receive prior to opening your franchise will be critical to launching a successful franchise. If current franchisees are not satisfied with the pre-opening training and support provided buy the franchisor, seriously question whether this is the right franchise for you and speak to your franchisor lawyer about adding specific training guuarantees to your franchise agreement should you decide to go forward.

2.  Are you Satisfied with the Franchisor's "On-Going" Training and Support?  While many franchisees open their business to a successful launch and impressive sales, on-going support is crucial.  A good franchise system is characterized by constant communication and support between the franchisor and its franchisees.  If current franchisees are not satisfied with the on-going support offered to them, again, you must question whether or not this is the right franchise for you.  Certainly raise this issue with the franchisor's sales people and your lawyer.

3.  Do the Numbers Make Sense? In other words, after paying royalties, advertising fees, product costs and operating expenses does the business earn a profit?  This is an apparent and critical question that too many prospective franchisees fail to consider and evaluate. When focusing on this issues ask as many questions as possible and speak to as many franchisees as you can.  Gather information and then discuss this issue with both your business accountant and franchise lawyer.

In addition to these initial questions you should have many others focused based on the particular franchise that you are considering.  I suggest that you write down a list of your expectations and then - prior to signing any franchise agreement - seek out and obtain as much information as possible to determine whether or not the franchise that you are considering is right for you.  Your decision should also be based on a candid discussion with your franchise lawyer and a thorough evaluation of the franchisor's disclosure documents.

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(Great, a lawyer answering a question about whether you need to hire a lawyer)

Answer? Yes - but not right away.  

The competent advice and guidance of a franchise lawyer will serve as a valuable tool (one of the many "tools" that are required) to be utilized on your road to entrepreneurship and the purchase of a franchise.  The advice provided by your franchise lawyer should be based on practical experience and involve a detailed review of the proposed franchise agreement and franchise disclosure document (FDD) and be followed by negotiatios with the franchisor.  However, while hiring a franchise lawyer is critical, it should not be your first step.

So what do I mean by "not right away"?  The process of buying a business is not a "sprint" (at least it should not be) but rather an "endurance event" that will require you to seriously evaluate your individual needs, business skills and expectations.  Once you have made this assessment, you will be faced with the challenging task of finding a business that is both profitable and right for who you are and your skill sets.  This is no easy task and will require that you do significant research (tons of resources available on the web), communicate with other business owners, communicate with existing franchisees (to do this, see "Contact Existing Franchisees before Signing a Franchise Agreement") and, possibly, seek out the advice of franchise professionals.  Don't just pick or get stuck on one particular franchise model or limit your research to the information provided to you by the franchisor's salesperson.  Remember, first and foremost, what matters most to a successful franchise investment are "profits" that will be  measured by your ability to take home money to your family each and every month.  So question everything.  If the franchise sells soup, then question how you will earn "profits" in the summer.  If the franchise sells ice cream, understand how "profits" are generated in the winter.  If the franchise appears to draw long lines or generate large revenues, then question what percentage of  those long lines and revenues are converted into "profits". 

Once you have completed your own internal analysis and "business review" , thats when the legal advice and analysis becomes critical.  The franchise agreement that you will sign will serve as the blueprint and road map for your business for many years to come.  As such, there are many, many critical issues that you must address with your franchise lawyer.  Some of the many issues that you must discuss and evaluate, include:

• The franchise fee that will be charged;
• The continuing royalty that you will be paying on a monthly or weekly basis;
• Advertising fund fees that you may or may not be required to contribute to;
• Approved vendors and suppliers of the supplies and products critical to your business;
• The protected territory that you may or may not be granted;
• Buildout and lease obligations that you will be required to undertake;
• Many, many other issues.

In many instances, (contrary to statements by a franchise sales person that their franchise agreement is "non-negotiable") your franchise lawyer will be able to negotiate and implement modifications to your franchise agreement that will have a substantive impact on your franchise investment and increase the odds for your success.  In today's economic climate, my experience has been that franchisor's are more willing than ever to negotiate with new franchisees.  Even things like deferring "royalties" for a number of months.  

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This weekend, driving back to New York from an an exceptional legal  conference in Virginia my partners and I came across one of my  childhood heroes (maybe not really a hero but a pretty cool guy):  "Bob's Big Boy". Meeting up with "Big Boy" reminded me, once again,  of the critical importance of trademarks and trade  dress to a franchise  system.  By the way "Bob's Big Boy" is a registered trademark of Big Boy Restaurants International, LLC.

For the prospective franchisor who would like to start a franchise or believes that franchised expansion may be in the future of his or her business, it is critical that you evaluate and protect your trademarks now.  Why is this so important?  Because trademarks and trade dress  are one of the most fundamental and critical assets of a franchise  system.  So, well before you start a franchise (where you will be  licensing your trademarks to franchisees) make sure that you consult    with a franchise lawyer or trademark lawyer (even if you are years  away from starting a franchise) and evaluate the following factors:

• Are your trademarks legally protectable?  Among many other factors,  your trademarks must go beyond "descriptive" terms and involve unique terms that have become associated with your business.

• Does your Trademark Actually Infringe on the Mark of a Third Party? It is quite possible that the mark you are using may actually infringe on the trademarks and intellectual property of a competitor.  Even if you never heard of the third-party competitor, depending on issues involving State and Federal trademark registration, your use of a trademark in one state, i.e., New Jersey, may actually infringe on the registered marks of an unknown competitor in California.

These points apply for any successful business - even if you never intend to start a franchise.The process for evaluating and registering your trademarks is not a complex process and may be accomplished cost effectively by a business and franchise lawyer.  Before you even contact a lawyer, you can conduct a basic and preliminary trademark search on your own by visiting the website of the United States Patent and Trademark Office (Click on the "Trademarks" Tab and then "3. Search TM Database").

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