By Michael Seid, Managing Director, MSA Worldwide

As an experienced franchising consultant, I am forthright about what I think is right and what I think is wrong about franchising industry practices. Even though my firm, MSA Worldwide, earns its living primarily as advisors both to companies looking to become franchisors, and to many leading franchise brands in the U.S. and internationally, we and our clients know well that it is in everyone’s best interest that potential franchisees understand what franchising is all about before they make an investment.

• Franchising can be somewhat complicated – it’s actually a bit of an art form – and in many ways, the culture of the franchisor is just as important for success as the particular business being offered through the franchise system.
• Likewise, it’s important that potential franchisees understand the franchise relationship and not fall into the trap of thinking that all franchisors are the same or equally good investments.
• Careful evaluation when selecting an opportunity is critical to anyone wanting to be successful as a franchisee.

It’s easy to franchise badly

Bearing in mind that there can’t be a franchisee until there is a franchisor, let’s begin from that vantage point: how to become a franchisor. And to mix things up, let’s look at the negative side of franchising by learning how not to do it, and how easy it is to do badly.

I was quoted in a popular franchise blog as saying that “anything can be franchised.” What I had actually said was, “anything can legally be franchised.” And the point I was trying to make was that there are no legal standards in the U.S. for who can become a franchisor.

No experience? No problem!

People new to franchising are generally surprised to find that in the U.S., you are not required to have ever operated the business you want to franchise. Your entire franchise offering can be based on a dream you once had, or maybe even a cartoon character you like (don’t laugh – this has happened).

• It’s not even a legal problem if you have no experience at all in the business you’re hoping to franchise and have not conducted any research into whether anyone is even interested in buying your products or services. All you need is an idea and someone willing to invest in becoming your franchisee.

But let’s assume that you do have a business, and today is its first anniversary. Congratulations!

• Unfortunately, your business did not make a profit last year and you really aren’t sure when it will break even, let alone make money or give you a return on your investment.
• Can you still franchise it? Sure. Having a profitable business is not a legal requirement for become a franchisor.
• But don’t you have to tell prospective franchisees how much they will make? No. There is no legal obligation to share your sales with prospective franchisees, or whether your unit made any money at all.

The sad truth is that the vast majority of franchisors in the U.S. don’t tell their prospects anything about unit economics. And, even without knowing if the business can make money, prospective franchisees make franchise investments every day.

• Remember, a great franchise salesperson has sold many franchises, and most buyers are likely making their franchise purchase for the first time. Even Yugo cars found more than a few buyers.

But I remain enthusiastic about franchising. Why? Franchising is a very important and successful part of the United States economy, because the majority of franchisors are well structured and have business practices in place to manage and grow great franchise systems that are sustainable in the long term.

• However, understand that franchise laws in the U.S. mainly focus on presale disclosure obligations – not all franchisors are well structured or well managed.
• There are quite a few franchisors that most people in franchising wish had never been franchised, because bad franchisors hurt the majority that do offer great opportunities.

Boilerplate franchising templates

To offer a franchise in the U.S., all you legally need to do is prepare some government-mandated paperwork and give it to your prospective franchisees before they sign the franchise agreement.

Working with qualified franchise lawyers and franchise consultants is extremely important for your long-term support as a franchisor. But legally, you don’t need a lawyer to draw up your franchise documents, and you don’t need an experienced franchise advisory firm like mine to design and structure your underlying business and franchise offering.

• You could buy a set of fill-in-the-blank documents, or download other companies’ franchise disclosure documents and agreements and modify them for your own purposes.
• Franchise brokers and franchise packaging shops will provide you with boilerplate strategies and legal documents, manuals, and marketing materials that they “customize” for you in a few hours’ time.
• Be careful, though. These are not paths that generally lead to success, and what you’ll likely have in a few years is simply a missed opportunity. For the sake of your stakeholders and also your future franchisees, take your time, work with professionals, and develop your franchise system with care.

But what about the regulators?

In a regulated environment like franchising, can’t you expect that federal and state regulators sniff out the bad opportunities before they came to market and that those franchisors’ documents don’t pass regulatory muster?

• No. The first reality is that it’s not the role of any government regulator to decide what a good franchise investment is and what a bad one is.
• The second reality is that even if a regulator had the talent, or the crystal ball or the right to pick and choose which franchisors were going to be successful, no one at the federal level and very few at the state level will ever see your franchise documents before you give them to a potential franchisee.
• The Federal Trade Commission never gets to see your disclosure documents before you use them, and most states have no requirement for you to send them the disclosure documents either.
• In the U.S. regulatory scheme, only a handful of states require you to submit disclosure documents and receive their permission before you can offer franchises in their states, and some of those states don’t even review them. These filing states are really only looking to collect a filing fee.

Franchising regulations generally only deal with the required types of disclosures and the process you must follow in making your franchise offering to a prospective franchisee. This may sound like a terrible situation that puts potential franchisees at risk, but in reality, since franchise disclosure laws were enacted, franchising in the United States has been transformed into a legitimate and, arguably, very safe form of investment.

However, the rules governing franchising do not guarantee that the underlying business is sound, or that the franchisor has the experience, skills or resources to be effective. As a prospective franchisor, please bear in mind that all “the rules” do is ensure that a prospective franchisee has information they can use to investigate a franchise opportunity and to make a decision on whether or not to make an investment in a particular franchise system.

I encourage you to explore MSA’s website Franchise Library, which includes detailed articles about what’s required to be a great franchisor from a business perspective, how to develop a successful franchise system, and a wealth of related topics. And don’t hesitate to contact us with any questions you have.

First published on AllBusiness.com