This how to franchise a business series by an MBA franchise attorney who doesn’t just talk the talk, but has actually walked the walk, concludes with a description of the third training module – implementing a franchise compliance program. In my thirty-plus years as a franchise attorney, testifying franchise expert and former franchise owner, I have observed two things. First, franchise companies make serious mistakes, usually during the franchise marketing cycle. Second, most of the mistakes could have been easily prevented, saving the companies from the ravages and turmoil of franchise litigation.
Copyright 1982-2009, Kevin B. Murphy, B.S., M.B.A., J.D. – all rights reserved
Inconsistent or misleading communications when a franchise is first sold can form the basis for future franchise litigation. And the cost of defending any franchise lawsuit, even a frivolous one, can be enormous. Franchise management involved in litigation are shocked to discover their company has fallen into a quicksand that swallows up time and money without limit. The cost of prosecuting even a “small” franchise litigation lawsuit can easily exceed $100,000 to $200,000, and up.
The starting point is having a solid, consistent Franchise Disclosure Document. But, it is almost impossible to avoid potential liability unless a genuine program of education and instruction is conducted with franchise marketing personnel as well as middle and executive franchise management.
An integrated Franchise Compliance Program sm that specifies rules and expectations, manages Franchise Disclosure Documents and controls the dissemination of all information is absolutely essential. It is also one of the best investments a franchise company will ever make.
For all of the above reasons, the use of “franchise brokers” is definitely NOT recommended. Their statements (or other actions) made to “close the deal” will make the franchise organization (and the personal assets of its officers) liable for violations of federal or state franchise laws. This also explains why the overwhelming majority of successful franchise organizations don’t use franchise brokers. They set up their own in-house marketing department so that actions and statements made during the franchise marketing cycle can be monitored and controlled within the framework of a Franchise Sales Control System (sm).
Franchise Sales Control is the other half of the franchise compliance program equation. While the compliance program specifies rules and expectations, franchise sales control is the mechanism for detecting gaps and inconsistencies. When detected, their causes can be identified and corrected before injuring the expansion effort. A Franchise Sales Control System should be designed with this in mind, and should include a variety of feedback mechanisms to monitor performance and retrieve pertinent information for review by franchise management.
This not only increases the effectiveness of franchise marketing efforts – it also greatly reduces the likelihood that sales personnel will deviate from established procedures in selling franchises. And a dedicated Franchises Sales Control System will create a complete back-up file for each franchise sold – a company’s best insurance against potential problems in the future.
Getting good advice from a franchise attorney expert about how to avoid being sued in a franchise lawsuit is just as important as getting insurance against the risk of fire, especially in today’s litigious environment. Our experienced franchise attorney expert who has worked on numerous franchise litigation cases has a wealth of practical knowledge about litigation avoidance and can help you avoid “legal time bombs” that can start ticking in your franchise business.
The communication lines that develop between the parties will have a major impact on the success or failure of the ongoing franchise relationship. Controlling who is brought into the network through the franchise marketing steps outlined above is the critical first step. Once inside the franchise network, franchise owners must be taught to realize they are members of a system of mutually-dependent outlets, each working for the better of the entire network.
Developing an awareness of this concept early in the relationship will create a positive attitude, encourage innovative ideas from franchise owners, ensure timely royalty payments and prevent franchise relationship problems later on.
For a cost-saving, line-by-line budget for how to franchise a business click Budget For Franchising A Business
A series of franchise management training as well as franchise marketing workshops and seminars are offered, either at your offices or at our executive retreat located in California’s Napa Valley Wine Country. Instruction is given by our Director of Operations, Kevin B. Murphy, an internationally-known Franchise Expert, franchise attorney, MBA, author and instructor who is known in the industry as “Mr. Franchise.” Mr. Murphy’s background and qualifications are listed in detail in the Franchise Expert page of this website.
Besides consulting with new and existing franchise companies, he is also retained by franchise litigation attorneys as a franchise expert to review documents and develop effective and successful legal strategies in franchise lawsuits.
Finally, Mr. Murphy owned and operated a successful franchise in 2002-2003. So his wealth of knowledge and first-hand experience will not only help your company develop an effective franchise development program, it will also provide a focus for managing franchise relationships and avoiding franchise legal pitfalls.
Many clients benefit from having Mr. Murphy perform an on-site inspection and analysis of their business before serious franchise development work begins. That way, he can determine what needs to be fine-tuned or developed for the franchise program. Part of this process includes providing guidance and direction so as much of the groundwork as possible can be done by existing personnel. This has proven to be a very effective approach, significantly reduces franchise development costs – and results in a professional end product.
Finally, our fee structure is based on doing this work for many decades, so your company benefits from experience curve pricing as well as expertise based on almost three decades in the franchise industry. You will save tens of thousands of dollars in franchise development costs getting into the franchise industry. And similar amounts going forward if you follow his advice.
The firm selected to franchise a business will be the most critical decision a company ever makes. Amounts paid to these providers are usually the bottom line answer to the question of how much does it cost to franchise a business. Use a high-priced franchise consulting firm and you’ll run out of money before you’ve even had a chance to enter the franchise industry. Or, your firm will be so desperate to recoup its $100,000-plus consulting fee that you’ll sell a franchise to just about anyone.
The consulting firm forgot to mention the fine print of their contract. It requires you to hire an attorney to review everything they do. Why? It’s because they’re providing legal franchise disclosure documents that affect legal rights, but they’re not attorneys. It’s called the unauthorized practice of law and you’re suckered into it. You end up paying two attorneys – yours and theirs – an expensive approach that sets you up for future franchise problems. The cost of franchise lawyer attorney is not cheap.
Or use a franchise attorney lawyer or law firm to do the legal work, and assume the complexities of operating a new business in the franchise industry will somehow work themselves out, and you’ve just fallen into another black hole. You may have a solid FDD legal document, but business mistakes here can cost tens, if not hundreds of thousands of dollars.
For a comprehensive list of questions to ask and issues to consider that will eliminate 95% of the individuals or firms claiming expertise in how to franchise or franchising a business, read our illuminating franchise article Evaluating Franchise Attorneys And Franchise Consultants: Critical Questions To Ask.