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LAW ELEVATED — It’s a good time to franchise your business – can you do it?

Benjamin Mitchell

Benjamin Mitchell

Franchising is used to expand – and cook up – many types of businesses, especially restaurants. This is understandable, as it’s often viewed as less capital intensive and less risky than other kinds of expansion. Mississippi has a strong history of restaurant franchising and, in my opinion, a host of opportunity for more. It’s not surprising – we’ve got great food.

So if you’re a restaurateur, how do you know when it’s the right time to franchise? You can start by looking at two things – the economy and your business.

Economy is looking good

The economy is warming up according to the IHS Economics 2015 Franchise Business Economic Outlook published for the International Franchise Association.  The combination of low gas prices and a strong dollar, says IHS, is boosting consumer spending. In fact, IHS predicts consumer spending to grow by 3.5 percent this year, up from 2.5 percent in 2014, and personal consumption of food services to jump from 2.8 percent in 2014 to 5.8 percent. Projected growth of franchise establishments will keep a slow and steady 2014 growth rate of 1.6 percent, but the economic output of franchise businesses is expected to rise 5.4 percent this year, compared with 5 percent in 2014. This is all generally good news for those who want to franchise.

The secret sauce

But even in a good economy a franchise will not work unless the business works for franchising. To franchise, you must make a photocopy of your business. If it’s too hard to replicate the experience, it’s not going to work. For example, customers may flock to a restaurant with an exceptional view of the gulf. The inland replica may not carry the same appeal.  Similarly, a more complex business is harder to franchise than a less complex business. If you can’t build it or teach it, you can’t franchise it.

Regardless of the business model, the numbers need to work for the franchisor and the franchisee. A franchisee is going to expect a reasonable ROI within a few years. But royalties and other fees to the franchisor will shave off anywhere from 3 to 10 percent of a franchisee’s top-line revenue.  Can the franchisee afford to pay the franchisor and still turn a respectable profit?  At the same time, the franchisor must balance the franchisee’s success with its own profitability.  This is no easy task.  A decision to charge a 4 percent royalty rate as opposed to a 5 percent royalty rate is a decision affecting 20 percent to 25 percent of the franchisor’s revenue stream.  To franchise, both parties must succeed.

Protect your intellectual property

If the business works and the numbers work, it’s time to prepare. For those interested in taking the plunge into franchising, protecting intellectual property early is critical because the franchise will only go as far as the IP will carry it.  For example, in Mattoon, Ill., the restaurant holding the title as the original “Burger King” is allowed to operate in an area of about 1,200 square miles.  The rest of the country belongs to the fast food giant of the same name.  Yet, had this original been the first to file for federal trademark protection, it would have gotten exclusivity over the other 7.8 million square miles of the US.  Instead, someone beat them to the trademark office and became the real king.  Don’t get stuck flipping burgers in Mattoon – protect your IP.

The politics of franchising

Of course you can’t be prepared for everything.  Last summer, National Labor Relations Board General Counsel Robert Griffin threw the franchise industry for a loop by labeling McDonald’s Corp. and its franchisees as joint employers. As a joint employer, McDonald’s could be on the hook alongside its franchisees for things like wages, workers compensation, payroll taxes and violations of worker’s rights at franchised locations. Joint employment could also open the door for unionization of all McDonald’s employees.  The Franchise industry, fearing the worst, has been gearing up for war over this issue.

But this war may end up being more of a skirmish, mainly because the issue seems far from being settled.  While Griffin and McDonald’s were duking it out in NLRB proceedings this spring, the NLRB’s associate general counsel, Barry Kearney, surprised all by declaring no joint employer relationship between the Freshii brand franchisor and a Freshii franchisee.  And elsewhere politicians are fighting back joint employer status.  Just this April, Tennessee passed a new law stating “neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisor for any purpose, notwithstanding any voluntary agreement between the U.S. Department of Labor and a franchisee.”

In time, the joint employer issue will be settled and undoubtedly new challenges will pop up. Franchising continues to thrive through it all, which is nothing less than a testament to its success. So, if you’ve got the right ingredients, I suggest adding a dash of franchising to your recipe

» Benjamin L. Mitchell is with Butler Snow Business Services Group


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