Should You Franchise Your Business Idea?

In any given business plan, getting your product, service, or intellectual property to market can take a number of avenues, each one of which has advantages and disadvantages, strengths and weaknesses. A method that works well for distributing your trademarked widgets may not cut it when it comes to your restaurant idea, or your recession-buster work-at-home children’s tutoring concept.

Let’s take a look at some of the principal distribution methods available to you.

Do It Yourself. Many entrepreneurs apply the old shoe leather to the distribution challenge, knocking on doors and making cold calls, looking for retailers interested in carrying a particular product, and selling directly to them. If you have a product that can be placed on retail shelves, added to a catalog, or carried by an online vendor, and a tight marketing budget, this may be the way to start out. Pro: Can’t beat the price. Con: Lots of doors slammed in your face.

Traditional Product Distributor. This arm’s-length relationship is product-driven. It works well for products that are self-contained and can be bought and sold with little needed in the way of buyer-seller relationship. Look for a firm that can handle your needs soup to nuts. A small Chinese electronics manufacturer I know uses an impressive small distributor firm in L.A. that handles most import issues, warehouses shipments of product, and ships out orders as they are submitted online. Some distributors will even get involved in product repair and customer support issues. Pro: They’ll do it all for you. Con: Won’t help you if you need to build relationships with your buyers.

Selling Business Opportunities. In this recession, a lot of people are coming up with new ways to help people start their own businesses. If your packaged program enables the buyer to begin a business, if the buyer must purchase goods and services from you for several hundred dollars or more, and if you make statements to encourage the sale such as “I will buy back all of the product you assemble,” “I guarantee you will make a profit from this business” or “I will provide you a marketing plan,” then you may be selling a regulated legal concept called a “Business Opportunity” or a “Seller Assisted Marketing Plan.” Compliance with laws will require a short disclosure document and, depending on the state where you are selling the opportunity, registration with state authorities. Pro: People will pay handsomely for an opportunity to start a business and make money. Con: Compliance with business opportunity regulation, and the legal expertise to accomplish it, can be expensive.

Franchising. Franchising is a method of distribution that has provided a remarkable road to riches for many entrepreneurs. It has an allure all its own: take a single successful business and replicate it dozens, hundreds, or thousands of time. The names of successful franchise companies -- McDonald’s, Pizza Hut, Subway -- have inspired many imitators.

The Federal Trade Commission and the laws of a dozen states regulate your distribution relationships if they meet the definition of a “franchise.” A “franchise” is present when a continuing relationship satisfies three concepts: (1) the licensed use of a trademark, (2) payment of money for the right to participate in the program, and (3) prescription of a “marketing plan” or the promise of significant assistance or the exercise of significant control over the franchisee’s business operation.

Should you franchise your business concept? It takes a complete analysis of the concept, of course, but as a rule of thumb, plan to create a franchise if you need to control the presentation and the delivery of the service or the licensed business itself, train the operator of the business, and maintain a continuing business relationship. Pro: Control is the great advantage of franchising. Con: Compliance with the regulation involved is costly.

Licensing and Independent Contractors. A “license” is a general term that really has no specific legal meaning; it means little more than a grant of right. You can certainly license someone the right to distribute or sell your product, but calling it a license does not allow you to skirt around franchise or business opportunity laws. A license may be found to be a franchise if the three elements of the definition are present, so you must do your legal homework first.

The same is true of arranging for distribution by an “independent contractor.” That term merely suggests that the relationship is not employer-employee and that there is no agency or other special legal relationship. The lesson is that you cannot rely on the label given to a business relationship; you have to dig deeper than the label.

There are a dozen different ways to distribute a product or service, and some have heavier legal consequences than others. If you are considering any of the methods that involve regulation, be sure to consult an attorney.