The temptation to go national out of the gate when launching a new franchise will be strong. If you haven’t filed in a registration or filing state, you are not allowed to talk to interested parties in that state. Even for a small operation, the possibility of turning away prospects in a neighboring state will leave a bad taste behind.
Which brings up the question: Which states should a new franchise file in?
It all depends on your franchise’s ability to meet the demands. Some organizations are about to go national from day one. Others never expand beyond one or two neighboring states.
While there are no wrong answers, there are serious implications and considerations to factor into the decision. Ultimately, you want to give your franchise the best footing for long-term success.
Financial Resources and Backing
The biggest factor influencing filing states rests on your financial capital. Registering in multiple states adds up. Before allowing a franchise to operate in their state, each state fits into one of three categories:
- Franchise Registration States: These fourteen states require a registration and approval of the franchise documents prior to selling units in the state. Individual state fees range from $125 to $675.
- Non-Registration States: These twenty-seven states plus the District of Colombia do not require filing or registration to be able to sell units in the state. They only require that the franchisor follow the Fair Trade Commission Trade Regulation guidelines.
- Filing States: These nine states require the franchisor to file an application and pay a fee.
To file and register in all 50 states plus the District of Colombia, the filing fees alone come in around $8,000. That doesn’t factor in the legal or administrative costs to complete the applications. The entire process requires a large sum of cash to compete. These annual fees can easily stifle a young franchise.
When determining which states to file or register in, it’s important to evaluate financial resources. Franchises with substantial backing tend to do better registering and filing in more states than bootstrapped franchises.
Particularly with franchises in California, you have a lot of real estate to work with in a single state. Some franchises stay strictly within the Southern California region and still do extremely well with over 50 units. Opening units in more states doesn’t necessarily mean more success.
I typically recommend that franchises start out regionally. This gives the organization a stronger financial footing to build a strong regional base before spreading funds thin across multiple regions.
It also gives additional time vetting the process. No matter how well you’ve done your preliminary work, there will always be a learning curve when franchising. It’s easier to keep an eye on new franchises when they are in your state versus 3,000 miles away.
Deciding if you have the capital to launch in multiple states is only half of the equation. You need to support each new unit that opens.
The majority of successful franchises spend more time in the beginning monitoring new units. As mentioned, there is always a learning curve in the beginning. This applies to vetting franchisees, implementing effective training, and understanding market trends among other aspects. Refining that process early on creates a strong foundation for growth.
Giving the proper training and attention to a unit in New York City where your home base is in San Diego causes challenges. If revenue numbers slump one month, you can’t swing by to see if the store is clean or if they have complied with the last franchise memo.
Franchises that have the capital to go national from the start build in support staff on both sides of the country or have resources in various regions. Time zones factor in as well. Fielding calls from the east coast when stationed on the west coast limits operating hours. Your typical eight-hour shift in California only gives east coast operators or prospective franchisees from noon to five in the evening to call. Depending on your type of business, those might conflict with the busiest hours of the day.
When planning to expand to multiple states, ensure you have the proper resources available to help new operators in that region. Their success defines the long-term success of the franchise.
Determining the Best Path Forward
If you are in the early stages of turning your business into a franchise, contact me today. As a seasoned franchise lawyer and part owner of a franchise, I can help you build the best legal foundation for long-term success with your franchise.