In light of the rapidly changing demographics of the U.S. consumer market, minority business enterprises (“MBEs”) are absolutely essential to the continued economic success and growth of the U.S. However, many MBEs struggle with expanding their businesses and growing their revenue base, and the pandemic proved that it is just too risky to have one channel of distribution. These reasons, among others, underscore why franchising may be a viable option for MBEs and why it is imperative that we have a program like Mayor Eric Johnson’s Franchise Initiative to identify, cultivate, and connect more MBEs to the franchising ecosystem.
Franchising is industry agnostic, so any business can utilize this strategy, and it has proven to be successful in sustaining and growing revenues and creating practical business opportunities for others. Given this, MBEs should take a closer look at franchising if they are (1) looking to expand their operations but unable to self-fund some or all of their expansion and (2) willing to partner, support, and share economic benefits with other entrepreneurs that are authorized to sell products and services under the MBE’s brand.
There are many benefits associated with franchising. From a business standpoint, franchising forces the MBE to protect their brand, goodwill, and intellectual property as well as develop and implement scalable business systems. Franchising allows a company (with minimum or no equity dilution) to grow with less contingent liability. Each franchisee of the MBE are business owners, and as a result of this, each franchisee will be more incentivized than company managers of the MBE to sell more of the MBE’s products and services. Finally, franchising does not prohibit MBEs from operating corporate units as well. This gives MBEs the flexibility to analyze the costs/benefits between operating an additional site themselves versus granting one of their franchisees with a license to operate at such site.
From a legal perspective, franchising can be used as an effective risk mitigation strategy. Many people do not realize how easy it is to fall within the confines of federal and state franchise and distribution laws. For example, if a MBE enters into a “license agreement” with another person/company and (1) the MBE provides training and support to that person/company and (2) that person/company pays the MBE any fees, then this arrangement most likely will be deemed as a franchise arrangement under applicable law. Moreover, if a franchise arrangement exists, the law requires the MBE to have a franchise program and provide detailed disclosures to that person/company. Failure to provide these legally mandated disclosures subjects the company and its owners to federal and state regulatory actions, criminal penalties, and lawsuits. Having a franchise program can potentially reduce a MBEs legal exposure from violations of law as well as help to defend against potential misrepresentations and fraud claims.
Given these benefits, franchising should be at the top of any strategies relating to expansion. There are many MBEs, throughout various zip codes in the U.S., capable of being successful franchised concepts. These MBEs just need access to a vibrant franchise ecosystem that will help them develop scalable and profitable franchise programs.
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