The following excerpt is from Rick Grossmann’s bookFranchise Bible. Buy it now fromAmazon | Barnes & Noble | IndieBound
Franchising your business doesn’t have to be difficult and expensive as long as you have a well-planned franchising roadmap and realistic expectations. Franchising your business can also be very lucrative as you take your already successful business model and duplicate it to build a thriving enterprise that can be worth big money in the future. Following is some information that can help you succeed.
1. Can you afford the franchising process?
Franchising your business doesn’t have to be terribly costly if you budget correctly and have a game plan. You don’t want to waste money unnecessarily or spend money that can be differed until you have revenue coming in from franchise sales.
You should be able to get a pretty good idea of the project costs when you interview franchise attorneys and franchise development consultants. Be sure you’re talking to experienced individuals who have active franchise practices. Standard business (and not franchise-specific) advisors can lead you down the wrong path or dissuade you from franchising due to their lack of experience or comfort with franchising. The franchise industry is very unique and has many elements that may not align with general business models, so choose your consultants and advisors wisely.
2. Impounds and deferred fee-collection stipulations
If you’re in a registration state and the attorney for the state examining your application for franchising determines you don’t have sufficient capitalization to open the franchises you plan to open, the applicable state agency may still grant you a permit to sell franchises. To do this, however, you must open an impound account in a bank chartered in that particular state for the direct deposit of all franchise fees. In essence, an impound is a trust account: The franchisor is required to have the franchisee write a check to the designated depository bank, to be held in trust until the franchisee provides a written declaration to the registration state that his or her franchise is open and that the franchisor has performed all of their opening obligations under the franchise agreement.
Once this declaration is received, it’s filed with the appropriate state registration agency; if the agency approves the declaration, it will prepare an order allowing the franchisor to remove the franchisee’s funds from the bank. The franchisor then submits this order to the bank, and the bank pays that particular franchise fee to the franchisor.
Unfortunately, not too many banks are familiar with these trust account procedures, and most escrow accounts are extremely expensive — $1,000 to $2,000 in some cities for each franchisee escrow account. In some instances, your franchise attorney may be able to convince the state authority that you’ll provide in your franchise agreement a statement that you will defer, or not require payment of, the initial franchise fee until the…