Legal Tip: Start-ups, Consider who Your First Franchisees Should Be

In my previous post I noted how important it is for start-up franchises to choose the right first few franchisees.  These franchisees can be your greatest marketing tool or biggest hindrance.They will be the people that prospects will be contacting to get a better understanding of several aspects of the franchise system - many of which the franchisor cannot directly talk about.  With that in mind, it is key that start-ups as well as small and mid-sized growing f'ors consider who their franchisees should be.  Here lies the tension between the owner/operator vs. the passive owner/investor.  Historically, many concepts such as fast food restaurants, car repair concepts, etc., believed that  it was vital for the majority owner of the f'ee to have complete skin in the game and have the franchise serve as his/her livelihood.  The f'ee was expected to run the business and live in geographic proximity to the units.  In fact, several concepts would not permit a f'ee to gain a second unit until they could prove that they could effectively operate the first. 

The other end of the spectrum has the owner/investor - this f'ee generally makes their livelihood from a different profession such as a doctor, financier, CPA, etc., and hire managers with no ownership interest to operate the units.  These passive f'ee's have the financial capacity to own multiple units but do not seek to run the day to day operation.  

Generally, established f'ors have broken away from the owner/operator concept as a practical matter.  Yet, for start-ups and smaller systems, it can be important to make sure that the f'ee has total commitment to the brand and is on the ground making sure that the unit is being operated correctly on a day to day basis.  A start-up may be presented with an investor who is willing to purchase multiple locations but who has no desire to partake in the day to day operations.  It can be quite difficult to pass up on a prospect who is well-healed but seeks a passive role (this is not to say that there aren't investors and groups out there that have proven success in owning and operating units).

While there is no "right" answer to this issue, it is something that every start-up should think about at the onset.  How much value do you place on having a f'ee that treats his unit as his livelihood vs. an investor that will rely on a general manager with no ownership interest.  Is it a wise business move to provide an investor with multiple units before they have demonstrated their ability to run one unit?  Who is the right franchisee for your system at the beginning?

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Jeremy Liebman is an attorney with the law firm of Kaufman, Miller & Sivertsen, P.C. in Atlanta, Georgia. Jeremy graduated from Emory University School of Law where he was the coordinating director of the Emory Moot Court Society and was awarded its Most Outstanding Member Award. Jeremy advises franchising and distribution clients on all aspects of the franchise relationship, including both transactional law and litigation. Jeremy works alongside John Sivertsen, former General Counsel of Arby's Inc. and the former Assistant General Counsel of Burger King Corporation. This column is not intended as legal advice and should not be relied upon in any way. No attorney-client relationship exists.  You should contact an attorney to discuss your matter.