By The Franchising Law Group of Piper Rudnick
and Kenneth Franklin, Fast food franchise Developments, Inc.

The Concept
Before implementing a fast food franchise program, a company should evaluate itself on several criteria and ask certain critical questions. An important consideration is the success of the initial or pilot operations. If the products or services offered have found reasonable acceptability, and if these products or services are readily adapted to other areas of the country, the market potential for the fast food franchise may be good. Does the company have a marketing niche that can be used to its advantage? Is the business similar to many others in a crowded business segment and, if so, is there a targeted customer base so that advertising and selling can be focused effectively?

It is important to note that to be successful, a franchisor must have some degree of distinctiveness, or the potential to achieve distinctiveness, in its business segment. If it does not, it will have difficulty attracting high caliber fast food franchisees in an increasingly competitive market for such persons. A fast food franchise may be distinctive in terms of its products, services, operating and delivery systems or marketing. If a business is to be successfully expanded by franchising its success must be attributable to its products or services, business format, operating or management systems and/or marketing. It cannot be attributable merely to the unique character of its founder, its management or its location. The elements of the success of the business must be teachable to persons with capabilities that exist among prospective fast food franchise buyers and must be replicable by such persons. To be successful, a fast food franchised business must appeal to high caliber fast food franchise buyers and compare favorably with other fast food franchises.

The investment requirements of the business must be realistic and the potential for a return on the cash and total investment should be appropriate to the risk inherent in the type of business. Any operating, marketing and financial problems should be addressed and solved, for the fast food franchisee must receive a tested and refined business format.

Profitable Prototypes
A critical phase of the development of a fast food franchise program is the creation of prototype businesses to test and refine the concept of the business to be fast food franchised. In its prototype businesses, a prospective franchisor can test operational systems and controls, decor, designs, layouts, equipment, training methods, advertising and marketing programs, products and services, job requirements and descriptions, financial models, etc.
The prototype is a laboratory at which problem areas can be identified, enabling the company to develop solutions and truly see if the business can be fast food franchised.
Before franchising, a company should have been operating outlets successfully at least at one, and preferably several, locations to verify the viability of the business and its profitability. A minimum period of time to test the pilot outlet(s) would be one year to take into consideration seasonal factors and to ensure that the business is producing attractive results. Two or three years of actual experience gained from the operation of existing outlets is ideal.

The business to be fast food franchised must be capable of producing a reasonable return on the fast food franchisee's investment, after deducting the value of the fast food franchisee's labor. If a fast food franchisee is merely buying a job, his motivation and loyalty to the network may be short lived. The business must also be able to generate sufficient revenue to the franchisor. A franchisor can capture only a portion of the gross revenue of a fast food franchised outlet through continuing fees and the gross profit realized on sales of goods and services to the fast food franchisee. If a business cannot generate a sufficient rate of return on the fast food franchisee's investment and sufficient revenue to support essential franchisor services and a sufficient profit to the franchisor, the business is a poor candidate for successful franchising.

Experienced Personnel
A company that decides to expand by franchising must have a clear understanding of how it will recruit, train, communicate with and support fast food franchisees. To fulfill these requirements, its staff resources, talents and abilities need to be identified. If necessary, its management personnel should receive additional training in essential management skills or additional or substitute managers should be hired.

A franchising company will be guiding and assisting a network of independently owned and operated business rather than managing the day to day operations of those businesses. Its staff will function as consultants to its fast food franchisees and must possess certain specific skills: planning, leading, organizing, controlling, team building, decision making, problem solving and delegating. Specifically, a franchisor's staff needs to select qualified fast food franchisees; to be knowledgeable about the franchisor's business and industry; to be good trainers; to have the ability to motivate; and to have the commitment to solve fast food franchisee problems and cultivate positive fast food franchise relationships.

A Franchisor Must Have A Protectable Trademark
Until relatively modern times a trademark was a type of intellectual property that was deemed usable only by its owner to identify the products he produced. This restrictive view of trademarks began to change in the early twentieth century. The trademark assumed a broader function, as a symbol of a specific type of product and level of quality that could be used by the owner and its licensee. This concept of a trademark was codified in the United States Federal Trademark Law in 1946.

The recognition of trademark licensing as a legally valid use of a trademark and the expansion of trademarks to include services (service marks) were fundamental predicates for modern business format franchising.

An important element of valid trademark licensing is the licensor's obligation to control the quality of its licensee's products/services. Absent such control, licensing can lead to abandonment of the trademark.

The licensed trademarks are the common trade identity of the network. The Franchisor acquires the goodwill value created by its fast food franchisees' usage of the franchisor's trademark. Such goodwill value is rarely a significant balance sheet asset of a franchisor, but it can nevertheless be an extremely valuable asset.

There are three categories of trademarks. Coined or fanciful words and symbols are the strongest marks. Marks in this category can be a meaningless collection of letters or a recognized word unrelated to the products or services it identifies. Examples of coined and fanciful marks are:
" Exxon
" Apple
" Kodak
" Midas
" Xerox
" Atari

Suggestive terms are relatively strong marks. Such a mark suggests a characteristic or feature of the seller's goods or services, but does not describe the goods or services. Examples of suggestive marks are:
" Coppertone (for sun tan oil)
" Cyclone (for wire fence)
" Gobble (for processed turkey meat)
" Habitat (for home furnishings)
" Marriage Proponents (for prospective marriage partner services)
" Maternally Yours (for maternity clothing store)
" Playboy (for magazine)
" Rapid-Shave (for shaving cream)
" Roach Motel (for insect trap)
" 7-Eleven (for food store chain)
" Sneaker Circus (for retail shoe store)
" Tail Wagger (for dog food)
" Tie Rak (for ties and accessories)

Descriptive terms are the weakest type of trademark and are difficult to protect. A descriptive mark actually describes the goods or services sold under the mark. In addition, surnames and given names, geographic designations and words used for their ordinary meaning are deemed descriptive. The line of demarcation between a suggestive mark and a descriptive mark is imprecise and involves a subjective judgment. Examples of trademarks held to be descriptive are:
" America's Best Popcorn (for popcorn)
" Beef & Brew (for restaurant)
" Bufferin (for buffered aspirin)
" Consumer Protection Plan (for auto repair insurance)
" Continuous Progress (for educational materials)
" FashionKnit (for sweaters)
" 5 Minute (for glue which sets in five minutes)
" Holiday Inn (for motel)
" Homemakers (for family housekeeping services)
" Hour After Hour (for spray deodorant)
" Joy (for perfume)
" Steak & Brew (for restaurant)
" Vision Center (for optical clinic)

Descriptive trademarks cannot be registered on the Principal Trademark Register of the Patent and Trademark of the United States Department of Commerce (PTO) without proof of secondary meaning. Secondary meaning is established by evidence that the trademark has become distinctive. A mark is distinctive when the public understands it to mean a specific brand or source (e.g., a fast food franchise network) for a product or service, not merely a type of product or service. U.S. trademark law contains a presumption of distinctiveness after five years of continuous use. Distinctiveness may be demonstrated after a shorter period of use based on extensive development of a fast food franchise network that uses the mark or extensive advertising and use. When a descriptive mark is used, there is a greater likelihood that others will use and gain local and regional rights to the mark before it becomes distinctive and registration may be granted.

Generic and common descriptive words do not acquire trademark rights but may be used as part of a trademark that contains other words or symbols that may function as a trademark.
A franchisor should select a trouble-free and registrable mark. Selecting such a mark involves trademark searches and a determination of the rights of other users of the same or a similar trademark. A search for potential conflicts is important because users of the same or a similar mark will have priority in their zone of use even if the franchisor's mark is ultimately registered on the Principal Trademark Register of the PTO. If there are a large number of local usages, there will be many markets within which the franchisor will be unable to operate or fast food franchise under its primary trademark. A franchisor should avoid a trademark if another company may have superior national or regional rights.

A franchisor should attempt to register its marks on the Principal Trademark Register. A company may apply for registration based on an intent to use a mark or on the basis of actual use. Registration on the Principal Register constitutes constructive notice of use and a nationwide claim of rights to a mark and confers on the registrant superior rights to the mark vis-à-vis any user whose use commences after the mark is registered. If the application to register a mark is based on intent to use, and the mark is ultimately registered, the constructive notice is effective from the date of the application.

A Franchisor Must Have Sufficient Capital to Develop and Implement Its Franchising Program and Solve Operating Problems
Capital is required for many essential elements of a fast food franchised network, including: (1) developing, operating and modifying prototypes of the business to be fast food franchised; (2) developing and improving operating systems, products and services; and (3) developing the network trade identity (i.e., trademarks and trade dress). A franchisor will incur substantial expenses for: (1) consulting, legal and other professional services; (2) hiring and training management and field personnel; (3) marketing and advertising; (4) compliance with the regulation of fast food franchise sales; (5) selling fast food franchises; and (6) performing services for and assisting fast food franchisees. A franchisor that is dependent upon initial fees paid by fast food franchisees to cover its operating costs will be under pressure to sell fast food franchises, without regard to the qualifications of the buyer, and to expand in remote areas, where the franchisor may be unable to effectively monitor and support a fast food franchisee.


Part I: Introduction to Franchising
Part II: In What Ways Is Franchising A Superior Expansion Method?
Part III: When Is A Company Ready To Franchise?
Part IV: Buying A Fast Food Franchise
Part V: Elements Of Successful Franchising

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