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The next steps of a soon-to-franchise restaurant company

June 20, 2012 by Harold Kestenbaum — Partner, Gordon & Rees, LLP

In my last blog, I discussed what to do once you decide to franchise your restaurant. Now that you've taken those next steps, where do you go from here? The first step is to retain the professionals who you have found. This will require signing up and providing the down payment on their fees. Typically, you will coordinate preparation of the operations manual in addition to development of the legal documents (FDD and the agreements). The accountant is the last professional who needs to be hired and brought on board.

You will learn that this process does not happen overnight. In fact, be prepared for at least a three to four month time frame, during which the ops manual will be worked on, as will the legal documents. The timing may be increased if you plan on filing your FDD in the various franchise registration states (a topic for a later blog). Some of these states are taking two to three months to approve an initial filing of an FDD.

Your consultant will schedule a time to spend days with you and your staff to gather the information necessary to put together and draft the ops manual. This can be a daunting task, but one that the owner of the concept should not take on alone. While this process is going on, legal counsel will more than likely send out an extensive questionnaire seeking information pertinent to the franchise offering being developed. Many times, the franchise consultant also will work with your legal counsel during this process. This collaboration is very important to the eventual development of the franchise program.

While this process is proceeding, you should, if you have not already done so, contact an Intellectual Property attorney who will work to register your proprietary mark with the United States Patent and Trademark Office in Washington. This is a key component of your franchise program, and something that you really should have done prior to making the decision to go into franchising in the first place. Better to know now if your mark is protectable and not after you have sold a bunch of franchises. I have a client who is in the beginning stage of selling franchises, and whom just found out that their mark is owned by another company. Now, they have to find a new name. The good news is that they have not sold any franchises yet.

Now that you are just about done with your FDD and ops manual, it is time to create the franchisor entity. It can either be a limited liability company or a corporation, funded with cash and other assets. Remember, you should not be using the same entity that owns your existing restaurants, create this new, fresh entity to conduct your franchise activities. This will insulate your restaurants from any potential liability down the road. Once you have infused the cash into this new entity, and by the way, how much should you deposit, will depend in large part on what states you want to franchise in first. If you are going to register in states such as Maryland, Virginia, or California, you should infuse no less than $150K. Once the cash is deposited, you then need to hire a CPA who, in my opinion, has done audited financial statements for other franchise companies.

Now that your FDD is completed, what comes next? Stay tuned for my next blog in this series.