Expanding Your Worker Cooperative Business: A Guide to Licensing & Franchising

ExpandingYourWorkerCooperativeBusiness

AGuidetoLicensing&Franchising

1. Introduction

This Guide is for worker owners, cooperative developers, lawyers, technical assistance providers and others thinking about expanding worker cooperative businesses We1 focus specifically on expansion through licensing and franchising. Licensing and franchising are ways to allow another business to use elements of your business New businesses can grow using elements of your business, and together, you may be able to reach economies of scale

The Guide explains in detail what licensing and franchising are and how they might apply to worker cooperatives. We also provide descriptions of cooperatives using these models The Guide lays out questions that will help you determine whether you are ready to expand and what type of approach would be best suited to your cooperative It also poses questions for you to consider and explains concepts that will help inform conversations with an attorney about expanding. Most importantly, it helps you to consider

How do you expand a worker cooperative while maintaining democratic worker control, autonomy and independence?

While business models such as franchises (think McDonald’s) typically operate on the principle of uniformity, where the expectation is that each business looks and runs

1 The authors, Maru Bautista and Gowri Krishna, have experience working with cooperatives that used various methods to expand, including licensing and franchising

the same way so that the customer’s experience of each is the same, it is possible to balance aspects of uniformity with autonomy for each separate business Each business can have its own internal decision-making processes and operations. You can still share and protect your brand while expanding the reach of the business and creating more opportunities for worker ownership and control.

2.Whatislicensingandfranchising?

Franchising and licensing are both ways of expanding a business by allowing new people to use the intellectual property (brand, methods, etc.) of the business. They are related to each other but are also different

Every franchise is a license, but not every license is a franchise!

One of the main factors distinguishing whether a license is a franchise is how much control the original business has over the operations of the new business.

➔ The more control the original business has over the new one, the more the new one looks like a franchise of the original business

➔ When the original business does not have control over how the new business operates, and is simply allowing the new business to use certain elements of the original business, then it is more likely granting a license that is not a franchise.

We describe each of these in more detail Licenses are simpler and easier to understand, so we will start with licenses first and then explain franchises, which are more complex

Licensing

When a business shares its intellectual property such as a trademark (a business’ name or logo for example) or technology with another business, it does so through a license. The licensor is the business that owns the trademark or technology, and the licensee is the business that obtains the right to use the trademark or technology A license agreement is an agreement that describes the licensing relationship between the licensor and the licensee Licensing agreements include a license fee The fee could be a one-time fee or an ongoing fee based on criteria such as usage and sales 2

2 Charles N. Internicola, Licensing vs. Franchising: Is There Really a Difference? (2019).

Franchising

Franchising involves licensing various elements of a business, but is broader than a license You might think about franchising as a business allowing another business to replicate it–the new business looks and operates like the original one. The established business is the franchisor, and the business that creates the replica is the franchisee. The franchisee pays the franchisor an initial franchise fee and ongoing fees (called royalties) to use the business’ brands, methods and reputation The franchisor might also provide training and guidance in running the business.

Buying a franchise is attractive to prospective business owners because they do not have to build a business from scratch, do not have to be experts in an industry and may also benefit from mass purchasing A franchise agreement between the franchisor and the franchisee spells out the terms of the franchising relationship.

Traditionally, franchisors can exercise a great deal of control over the franchisee. They might dictate the location of the franchise, the appearance of the business, the products, bookkeeping methods, advertising and sales, business hours, the qualification and dress of workers, and even prices to some extent They also hold a lot of power when it comes to terminating the franchise. The franchisor’s main concern is with protecting the franchise brand Name recognition, quality of goods or services, customer satisfaction and loyalty are all part of a brand. When operating multiple businesses under the same brand, each business can impact the entire brand and its value as a whole.

If one business provides goods or services of a quality not on par with the others, it can affect the franchisor and all of the other businesses Thus, a franchisor has a strong interest in ensuring that the franchisees maintain certain standards.

ElementsofaFranchiseUnderFederalLaw

We will discuss the definition of a franchise under federal law in detail here, but we note that each state has its own definition of franchise that might be more broad or narrow than the federal definition It is crucial to understand your state’s definition of franchise as well as the federal definition because it is possible that an arrangement might be considered a franchise under one and not the other

The Federal Franchise Rule, the federal law that governs the offering and sale of franchises, says that you have a franchise when you have a business relationship where the franchisor:

1. Provides a trademark;

2 Exercises significant control or assistance in the operation of the business; and

3. Requires a minimum payment of $500 during the first six months of operations

Let us look at each element in more depth

(1) Provides a trademark. This is where a franchisor gives the right to a business to operate or distribute goods or services that are identified or associated with the franchisor’s trademark.

(2) Significant control or assistance. You might wonder what constitutes significant control or assistance The more that a franchisee relies on the franchisor’s control or assistance, the more likely that the control of assistance will be considered significant If the franchisee is relatively inexperienced in the business being offered or there is large financial risk, there might be greater reliance on the franchisor. For Page 8

control or assistance to be significant, it must relate to the overall method of operation, not to only a small part of the franchisee’s business

Examples of significant types of control are: site approval for unestablished business; site design or appearance requirements; hours of operation; production techniques; personnel policies; promotional campaigns requiring franchisee participation or financial contribution; restrictions on customers; and locale or area of operation. Significant types of assistance include formal sales, repair or business training programs; establishing accounting systems; furnishing management, marketing or personnel advice; selecting site locations; furnishing systemwide networks and website; and furnishing a detailed operating manual.3

When a franchisor provides promotional activities that do not come with other forms of assistance, that would not be considered significant This includes a franchisor providing advertising displays, sales kits, product samples and other promotional material to help with making sales. When a franchisor imposes controls to protect its trademark (such as displaying the mark and having the right to inspect), imposes health or safety restrictions required by law or assists in obtaining financing to transact business, that would not count as significant control or assistance

(3) Required payment. If the purchasers of the business arrangement must pay the franchisor at least $500 before or within the first six months of operations in order to obtain the franchise or start operations, then this element of the franchise definition is met. Payment includes all sources of revenue that a franchisee must pay to a franchisor including not only an initial franchise fee but any rent, advertising assistance, equipment and supplies, training, security deposits, non-refundable bookkeeping chargers, promotional literature, equipment rental and continuing royalties on sales. Note that even if you do not require payments of at least $500 within the first six months, you might still fall under definitions of franchise under your state’s laws.

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3 Federal Trade Commission, Franchise Rule Compliance Guide (2008).

FranchisesandStateLaws

States vary in their requirements for franchisors Some states require franchisors to register their franchise disclosure document prior to offering or selling a franchise and to update their registration at least annually Other states require franchisors to file a notice but do not require registration. A number of states do not require either filing of a notice or registering You can find a list of state requirements here and should also check with a lawyer for the most up-to-date requirements in your state.

Side note: there are exemptions at the federal and state levels for certain cooperatives from having to register as a franchise Those cooperatives include agricultural co-ops, retailer-owned cooperatives, and nonprofit cooperatives. They do not typically include worker cooperatives, but it is worth looking into whether your state has exemptions for cooperatives, and if so, whether it would apply to your cooperative

LicensingandFranchising: AComparisonofOperationalElementsforWorker Cooperatives

ELEMENTS LICENSING FRANCHISING

Estimated time to set up 3-6 months

Legal requirements

● Protect your intellectual property, possibly through trademark registration

● Develop and review your license agreement with a lawyer

● No license registration or filing requirements.

12-24 months

● Protect your intellectual property, possibly through trademark registration.

● Develop a Franchise Disclosure Document and Franchise Agreement with franchise lawyers.

● Create an Operations Manual

● Prepare audited financial statements

● Register your franchise if you are in a registration state

Cost to set up (estimates)

$3k - $6k

● Lawyer fees, trademark registration.

$20k - $90k

● Lawyer fees, trademark registration, franchise registration fees, some franchise technical assistance costs, infrastructure development costs

Infrastructure

● Develop a system to track licensees

● If there are shared services for licensees, develop infrastructure for joint purchasing and information sharing

You have systems and resources in place to:

● do outreach, field inquiries and select potential franchise partners;

● determine the financial viability of a new location;

● collect monthly royalty payments, including how to easily receive and store monthly financial documents, as well as ACH bank transfer fees;

● easily share documents, announcements, and general information to all franchisees;

● train new franchisees in all elements of your business model, and are able to list them in the franchise disclosure document;

● provide technical assistance to franchisees as they open their businesses.

Additionally:

● Your marketing systems include a strong brand, sample collateral materials, and a platform to easily download and adapt these materials.

● Your Operations Manual is final, including lists of preferred vendors by city.

ELEMENTS LICENSING FRANCHISING

Control

The licensor doesn’t have a lot of control It can provide guidance on the use of the trademark, including:

● Use of the brand

● Marketing strategy.

● Sharing of a website with individual sub-pages for each licensee

Licensor could have some control of the services associated with the trademark. Licensees could choose from a list of pre-approved services, so the brand stays protected.

● Term of agreement There is no limit on what the term can be You can consider anything from 1 year to 10 years!

The central franchise entity can have control in the following areas, for which you will need to have accountability systems built in:

● Services You must determine the list of services and how they need to be offered (create a set of trainings on systems and policies)

● Financial documents. You know what you will require from franchisees on a monthly basis (typically a profit and loss statement and balance sheet).

● Term of agreement Typical length in a franchise agreement is 10 years, but can be lowered if need be

Fees paid from Licensee/ Franchisee

→ to Licensor/ Franchisor

Network

● Can include license fee.

● Other fees can be included in an agreement and depend on additional services the licensor provides to the licensees.

● Franchise fee, which is the initial cost of buying a franchise

● Royalty payments (typically a % of monthly revenue).

● Additional fees for other services, listed in the franchise agreement such as technology fees, brand development fees and conference fees

● As a licensor you have the flexibility to create a network of licensee cooperatives, depending on your overall strategy and goals.

● Franchisees are encouraged to share lessons and best practices with each other, there is flexibility in a franchise system to accomplish that

● Franchises can have working committees

● Typically there are annual conferences.

● There is a vast network of technical assistance and general support for franchisors in the United States

3.Shouldyoulicenseorfranchiseyourworker cooperative?

In the previous section we presented the definitions and main elements of a license and a franchise Now we will help you assess your readiness to expand and help you determine whether licensing or franchising is a good fit for your expansion goals. This section has various activities that we encourage you to complete with your team. If you are a cooperative developer considering expanding your cooperative development model, use these questions and activities with your team to help clarify your project goals.

Articulateyourgoalsforexpansion

If you have not already done so, you should articulate your goals for expanding your business Take some time to discuss your goals within your cooperative to make sure there is clarity on the purpose of expansion. These goals and purposes might change over time, but it is good to consider them from the start and revisit from time to time.

Activity Instructions:

Answer the following questions and write your goals for expansion in the space provided below:

Big picture:

● Why do we want to expand our business?

● What is motivating us to expand?

● What is our ultimate vision for expansion?

● What is our dream outcome in 3, 5 and 10 years?

More specific:

● Are we looking to expand models of worker ownership?

● Are we looking to expand our business?

● Is our goal to generate a steady revenue stream for our worker cooperative through expansion?

● Is there demand for our services/products that we are unable to meet without expanding?

● Is there a market or competitive advantage to expanding our business, something that can only be achieved through scale?

Determinewhatisreplicableinyourcurrentbusiness model

When you have clarity about your goals for expansion, you have to know what you are replicating Do you know what element(s) of your business are most replicable? Below, you will find some ideas of elements you could replicate in your business.

Activity Instructions:

Make a list of the elements of your business and place a next to the ones you think are replicable from your business model.

Non-exhaustive list of what could be replicable from your current cooperative business

We have a profitable business model. Our business model is strong and has made us profitable in a short period of time

We have a strong brand. We have invested in our brand identity and our name and logo are recognizable. We provide high quality services in a challenging industry. There is something unique about the way we provide services, and customers have noticed. We have perfected practices that are cost-effective and high quality. We developed technology that improves our operational systems. We invested in a tech asset that makes our systems function more efficiently. We have a strong network of vendors or partners. We have cultivated relationships that strengthen our business, we know how to build these partnerships, and we have identified the best vendors for our business model.

We have developed training programs for workers that work. We have special curriculum tailored to the needs of our communities: industry-specific training, co-op specific training, etc

Other. Is there anything else you have developed that is unique?

If you have a few elements that are replicable, great! Let’s go on to assessing your readiness, because it is one thing to know you have a replicable element or an entire business model that can be replicated, and another thing to be ready to share that with others

Assessyourreadiness

If you have a vision for expansion and you know what you are replicating, it’s now time to figure out how ready you are to expand Please note that embarking on the project of expanding your worker cooperative should not be taken lightly. To help assess your readiness, we will focus on three elements: a strong business idea, capacity & resources and external interest:

● Do you have a business concept that is strong enough to replicate?

● Do you have enough people, tools, and capital to dedicate to your expansion efforts?

● Do you know if others are as interested in your concept as you are?

Activity Instructions.

● Bring everyone together from your worker cooperative or among those involved in a replication project to assess your readiness.

● Read all statements under each category and place a along the spectrum to visualize where you are.

● Reflect on what your responses mean about your readiness to consider expanding your business.

1. We have a feasible and replicable business concept.

2. We have resources to invest in exploring how to replicate our business model (or specific elements).

3. We know there is interest in our business model.

If you found your answers to be on the right side of the spectrum, you are likely ready to move on to next steps for expanding your business If you found that your answers were mostly on the left side of the spectrum, keep working on strengthening your business to get it ready to expand Don’t be discouraged, but recognize you may have more work to do to get to a place where you are ready to expand.

Whichmodelalignsmostcloselywithyourgoals?

While licensing and franchising are not the only models for expansion, this guide is focused on these two The tool below will help provide a framework to determine whether you should consider a license or a franchise model.

Questions Score

Our motivation to expand is to share something viable that we have created

Our motivation to expand is to increase profits for our worker cooperative

When we think about expanding, we imagine creating other businesses that look and operate just like us.

We imagine developing a network that connects all the worker cooperatives using elements of our business model.

We want to be connected to the worker cooperatives using elements of our business model, as long as our business is in operations.

We want to control how our brand or elements of our business we are replicating are used (we want to have guidelines, offer trainings and create accountability systems).

We want to provide technical assistance to support businesses that use elements of our business model.

We want to charge a monthly fee to those using our brand or elements of our business model.

Total score

4.Expandingyourcooperative

Once you have decided to pursue expanding your cooperative through licensing or franchising, there are a number of steps to take. The more technical steps will require working with a lawyer It is helpful to seek legal advice earlier in the process rather than later so that you can get a clear sense of what you will need as you expand.

The goal for this section is to give you a jump start in understanding concepts and thinking through decisions you will need to make These steps are not linear There are a few steps you will need to work on simultaneously and some you will need to do consecutively Each step informs the other and will require that you go back and forth and refine as you get new information. We recommend that you look at all the elements, read the sections and then develop your plan

Identifyandsecurewhatyouwishtoreplicate

The core of expanding through licensing or franchising is identifying what you wish to replicate. Some examples of what you might replicate are: your cooperative’s name, logos, other branding, services, products, systems of operations, and technology.

Once you have identified what you will replicate in the new business, determine what, if anything, is your intellectual property. What type of protection does it have

currently? Do you wish and/or is it possible to protect your intellectual property through registering with your state or the U S Patent and Trademark Office (USPTO)? You should consult with an intellectual property attorney to help you understand what you can protect and how to go about obtaining protection

Copyrights. A copyright is the exclusive legal right to reproduce, publish, sell or distribute original works of authorship The work must be created in a tangible form–not just an idea that lives in someone’s head but is written down or recorded. Examples of works of authorship include literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture. Copyright does not protect facts, ideas, systems, or methods of operation.

Copyright protection exists from the moment you create the work. You do not need to register a copyright with the U S Copyright Office to protect it, though registration offers benefits including a public record of the copyright claim, making it easier to assert ownership of a work if there were ever a lawsuit over who owned a work An intellectual property attorney can help you determine whether it is worth registering your copyright and guide you through the registration process The cost of registration alone (not including legal fees) is $65 per copyright registration.

Trademarks. Trademarks protect words, phrases, symbols or designs identifying the source of goods or services of one party and distinguishing them from those of others. “Service mark” refers to a mark that identifies a service rather than a product.

“Trade dress” means a product’s shape, packaging and design Both trade dress and service marks are types of trademarks. For a mark to qualify for trademark protection, it must be used in commerce and it must be distinctive You either have to be using the mark or you have to have a good faith intent to use it at a future date. The distinctive requirement means that the trademark identifies a particular product or

service. The more distinctive and less generic or merely descriptive a mark is, the greater likelihood it is to have trademark protection A famous example of this is the Apple logo. The mark itself, an apple, bears no relationship to computers–its use is considered arbitrary and easily distinguishes it from other companies On the other hand, if you named your bakery “The Donut Shop,” that name would be too generic to receive protection (that is, you could not stop others from naming their business the same name).

Trademark protection can exist without registering a trademark. If you are using the mark in commerce, if it is distinctive, and if you are the first to be using it, you have rights to the mark in the geographical area in which you are using it and can keep others from using it in that area without having to register the trademark To get greater protection, you could register a mark with your state or federally with the USPTO Registration with the state gets you protection throughout the state and possible other benefits depending on the state Federal trademark protection is greater than protection with a state. It gives you the right to exclusive use of the trademark nationally (unless others have not registered the same trademark and have used it prior to your federal registration date); the right to use the registration symbol ® after the trademark, which limits others’ attempts to use the same mark; and federal registration acts as evidence of your mark being valid–a challenger will have to prove that despite your registration, they possess a stronger claim

When you register with the USPTO, you choose a class or classes to register your goods or services, and you receive protection only within that class. The class refers to the category in which you are using the mark For example, if you register your construction business’ name under the construction class, you would not have protection of that name if it were used by another business as a moving company’s name because a moving company would fall under a different class than construction You can register for multiple classes, but you would pay a registration fee for each class (currently a minimum of $250 per class). The registration process requires submitting an application to the USPTO The USPTO assigns an examining attorney who reviews the application and determines whether or not the mark will be registered. The examining attorney will review the mark to see if it fits the criteria for registration including making sure it does not infringe upon any existing registered marks or that it is not generic. It typically takes about eight months from the time you apply to obtaining registration Before you move forward with registering a trademark, it is important to consult an intellectual property attorney who can help determine the likelihood of success of registering and can help you in properly submitting the registration materials.

Trade secrets. Trade secrets protect confidential business information such as a proprietary process, instrument, pattern, design, formula, recipe, method or practice

not evident to others and that offers an advantage over competitors or provides value to customers You do not register a trade secret A famous example of a trade secret is the recipe for Coca-Cola®, one of the most valuable recipes in the world. Because the recipe is kept secret, it is entitled to protection in the courts Trade secrets must not be public information, the secret must be actively protected, and it must provide an economic benefit to the holder If the trade secret holder does not safeguard the secret, or if the secret is discovered, released or becomes general knowledge, you lose trade secret protection Having employees or business partners sign non-disclosure agreements (NDAs) is one way to protect trade secrets. The person signing an NDA agrees not to disclose a company’s confidential information

If you believe someone is misusing your trade secret, you would have to bring action against them through the courts

Patents. A patent protects inventions or discoveries To have patent protection, you have to apply for a patent with the USPTO If you are given a patent, then you may sue anyone who infringes on that patent (anyone who sells, imports, uses or makes the patented invention) There are several factors that the USPTO considers when determining whether to give a patent. The invention must be a new and useful process, machine, manufacture, composition of matter or improvement It must be deemed useful, and it must differ from existing or publicly known creations. Again, working with a patent attorney is critical if you think you might have something you wish to patent.

Determineyouroverallstructure

How will the new business(es) be connected to your current one? In other words, what will be your overall structure for the expansion? Who will own the intellectual property you have identified above, and how will it be shared with the new business? What decisions will your current business make? What decisions will the new businesses make? What sorts of controls will your current business have over the new one(s)? How do you limit the liability of each business? Who covers initial and ongoing costs? How will money flow between businesses?

Structuringmodels

We will discuss two structures for business expansion The first is a structure in which your current cooperative business holds the intellectual property (IP) and allows the new cooperative business(es) to use the IP either through a license agreement or a franchise agreement. The second is a structure where you create an entity separate from your current business to be a central entity that holds the IP and allows your current cooperative as well as any new cooperative business(es) to use it

If you are a co cooperative b cooperative d central entity

Structure 1: C

In this structu an agreemen the current c a limited liab from liabilitie

You should co own, what de decisions bot spell out the say

In this model, money typically flows from the new coop(s) to the current one through an initial fee and ongoing royalty payments as well as other fees you might put in

4 Limited liability is a legal protection you get if you form a business that has limited liability protection. A business with limited liability means that owners or investors of the business cannot be held personally responsible for the business’ debts or financial losses If the business goes into debt, your personal assets (a car, home, personal bank accountants, etc ) could not be used to pay off the debt If you did not have limited liability protection, your personal assets could be taken in order to repay the debt.

place. Of course, how much and whether or not you wish to charge these payments is up to you

cooperative development organization itself can be tricky or a non-starter for some organizations

There are multiple options for how you structure the central entity Depending on your objectives, the central entity could be a cooperative of cooperatives or a nonprofit organization with a membership and/or board consisting of the cooperatives that share the IP. You might see these types of structures referred to as secondary cooperatives, federations or associations

New Central Entity is a cooperative of cooperatives

If your objective is to share ownership and control over the intellectual property with your current cooperative and any new ones, creating a cooperative made up of cooperatives allows for that. The cooperatives that share the intellectual property would each be owners of the new cooperative that holds the intellectual property The group would collectively make decisions about the IP as well as any other functions or you desire for it to have.

If you create a cooperative owned by the cooperatives who share ownership of the intellectual property licensed or franchised to them, you must consider issues that arise around fiduciary duties. Fiduciary duties are duties that directors and officers of a corporation owe to their corporation One of these duties is called the duty of loyalty. The duty of loyalty requires that the directors and officers place the interests of the corporation ahead of their own This means that if a director or officer of the central entity cooperative is also an owner/director/officer of a cooperative that owns the central cooperative, they must wear their “central entity hat” while making decisions for the central entity. They must think of the interests of the central entity ahead of the interests of the coop for which they are a member With agreements running between the central entity and its co-op member-owners, you can see that a director from a cooperative member would be involved on “both sides of the transaction”–as a board member of the central entity cooperative and as a worker-owner of the cooperative contracting with the central entity Whose interests must the director keep in mind? The cooperative of which they are a worker-owner or the central entity cooperative? Following some basic corporate practices will help reduce potential issues that arise around the duty of loyalty It is important for each of the businesses to have a conflicts of interest policy that gives clear guidelines for procedures to follow when a potential conflict arises It is also a good practice to have disinterested members of the board which means having members who are not also members of the cooperatives that own the central entity

New Central Entity is a tax-exempt, nonprofit corporation

Another option for how to structure the central entity is to create it as a nonprofit corporation with tax-exempt status, making it exempt from federal, and possibly Page 26

state, income tax. Structuring the central entity in this way requires setting it up with the purpose not to make money but instead to promote the common interests of the licensing or franchising cooperatives and/or to carry out a charitable purpose. It is important that you consult an attorney who specializes in nonprofit law to help you determine whether and what type of tax-exempt status the central entity could qualify for

If the purpose of the central entity solely is to support the cooperatives, then the central entity might qualify for tax exemption as a 501(c)(6) organization, a type of tax-exemption for trade associations, professional associations and business leagues The primary purpose cannot be to engage in regular business normally carried out for profit, so you must take care in choosing this entity type and developing other functions beyond holding the shared intellectual property. An example of a 501(c)(6) organization is the U S Federation of Worker Cooperatives

If the purpose of the central entity is to engage in economic development work more broadly, targeting low-income or otherwise marginalized communities, it might qualify for tax exemption as a 501(c)(3) organization, thus better positioning it to receive foundation funding and individual donors who can make tax-deductible donations. The 501(c)(3) tax-exempt, nonprofit corporation structure might be most attractive to nonprofit cooperative developers looking to expand worker cooperatives. An example of a 501(c)(3) organization is Coopportunity, Inc., the entity that serves as the franchisor for the Brightly® cooperatives, described in detail in Section 6.

With a nonprofit corporation structure, you can give voice to the licensee or franchisee cooperatives by providing them with seats on the board of the central entity, or membership in committees. However, you should be mindful of the fiduciary duty issues discussed in the previous section, as they can arise in the nonprofit corporation context as well. It is particularly important for tax-exempt entities not to engage in commercial activity and not have its earnings benefit private shareholders or it can jeopardize its tax-exempt status

Namingthenewcooperative

If you plan to have the new cooperative operate under the same name as your current one, then you should consider forming the new business under a legal name that is unrelated to the shared name There are a couple of reasons to do this The first is that your state will not allow you to form an entity with the same exact name as another existing entity in the state A second reason is that if you ever sever ties with the new cooperative, it would not have to change its legal name to show that it is unrelated to your brand The new cooperative could be formed under a generic name (let’s use 123 Main Street LLC as an example). Then, it would file a “doing business as” (DBA) name to operate under the same name as yours, though the DBA likely cannot be the same exact name as an existing entity or DBA, so you could find a way to distinguish it–123 Main Street LLC d/b/a Our Current Coop (Westside) The new cooperative could operate using the shared brand name.

Developaplanforfinancing

You need to have a strong business plan to project your financing needs for creating and maintaining a franchising or licensing structure as the franchisor or licensor. There are, of course, costs to develop and maintain the licensee or franchisee cooperative. You can determine whether and to what extent you will be involved in supporting the financing needs of the licensee or franchisee

We have estimated some initial licensor/franchisor set-up costs, but you will need to know how much it will cost you to operate your system in the first few years. Will you hire staff to manage the franchise or license system? How long will it take to break even? Once you have strong projections, you will be able to determine how much capital you will need Some of the key questions–and answers–will flow from your work to determine overall structure: Who will bear the costs for what part of the startup support work? How will the business be capitalized, and who is responsible for providing or raising that initial capital?

There are a few options you may want to consider for raising capital:

Loans. If your purpose is to add a line of business and generate revenue for your worker cooperative through franchising or licensing, it may be best to apply for a non-extractive loan Look for a local option where you are Some sources of friendly loans include: Page 28

● Cooperative lenders. There is a growing field of loan funds that lend to cooperatives, including to startups See the footnote below for a non-comprehensive list.5

● Local community banks. It is generally quite difficult to raise startup funds from local banks, but building a relationship with a local bank and planning to approach them after the business has started for an early-stage growth loan could be an option

● Friends and family. Some cooperatives raise initial capital by asking lots of friends and family for small startup loans that they can then pay off with one bank loan once the business is up and running.

● Pre-purchase contracts You can ask loyal supporters and prospective customers to prepay; this is essentially a loan that you will pay back by providing the products or services

Equity There may be investors who support your mission and business model, who want to invest equity in the project Equity is different from a loan: it does not need to be repaid on a fixed schedule, it tends to be higher risk and it may have control rights attached to it In some cases, equity investors may expect a higher return than lenders if the business does well. In other cases, they are donating funds to be used as equity Some sources of friendly equity include:

● Grant Funding. If your purpose in franchising or licensing is to share your model to lower the barriers for other worker cooperatives to start a strong business in your industry, you may be able to finance the setup through grant funding. You will be less likely to get grants for the management of your system, but it will be possible to request funding to build your infrastructure or to pay for the initial system setup

● Self-financing. Your business may have reserves you could allocate to the initial stages of research and development of your expansion project. Having a strong business model for replication will allow you to self-finance your growth

● Community fundraising. If you are able to organize and reach your community towards and are able to run a fundraising campaign, you may consider raising funds this way. Take into account that local fundraising efforts can be wonderful for raising awareness about an issue, and may not be the best or first option to capitalize the growth of your business. Be sure to consult with a lawyer here in case there might be issues related to securities law (that is, if you are offering shares in the new business to investors, you will have to be sure you meet an exemption from registration as a security or that you register).

5 Some cooperative loan funds include the following: Seed Commons, Local Enterprise Assistance Fund (LEAF), Shared Capital Cooperative, and Cooperative Fund of the Northeast (CFNE).

Seekand/ordevelopprospectivecooperators

A strong license or franchise system will need to develop a pipeline of cooperators interested in replicating or using elements of your business. You should consider who would be likely to want to become a licensee or franchisee, what may be appealing to them and how you can target them, and who may become a strategic partnership in your efforts All these cooperators will have different needs, so you will need to develop materials and have channels of communication that target each of them Be mindful of this, and invest time and energy in developing a strong pipeline, so your system is able to meet your growth projections.

Here are a few examples of the various types of cooperators you should consider:

● Cooperative entrepreneurs. Some prospective cooperators may want to start a cooperative in your industry, but may not have enough experience, and could benefit from the know-hows and tools you’ve developed.

● Startup businesses. Your franchise or license project can be appealing to those businesses starting up. You may help lower the risk of starting a new business, ensure profitability, and offer being part of a network

● Existing businesses. If you are licensing elements of your business that offer significant value, like a brand, technology or training, existing businesses may be interested in joining your system Existing businesses that may be struggling, may benefit from joining a franchise, re-organize themselves and re-launch under a new brand

● Potential partner organizations or institutions. In some cases, organizations may become partners to help with outreach, connecting to the community, or help establish local partnerships for technical assistance. While they won’t be the ones signing a license or franchise agreement, they may play a significant role in your expansion efforts.

● Co-op development organizations supporting new worker cooperatives. Some cooperative development organizations may be interested in utilizing a license or franchise structure as they incubate new worker cooperatives. Co-op developers may not have industry experience and could benefit from having tools and tried out systems, but could support the initial stages of developing a business, imagine community outreach, initial elements of how to function as a worker cooperative, and supporting groups through incorporation. A franchise or license system could give them the necessary elements to get to a successful launch.

● Academic institutions. Research could play an important role as you develop and grow your business. There isn’t much literature on franchising and licensing. Partnerships with scholars could help gather information about your processes, write about your goals, steps and learnings, and talk about your efforts to new

audiences. Academic institutions could also be strong partners through their law clinics or business school programs, adding important value to your work (often provided as pro-bono services).

You will also need to develop marketing and outreach strategies to ensure you are reaching your targeted cooperators A few options include:

● Have a dedicated page on your website. You can use your existing website to talk about how others may benefit from your franchise or license system At minimum, you want to have basic information about the system, and an inquiry form to generate a list of contacts you can follow up with

● Use social media. Use your social media channels to talk about your franchise or license system. Have dedicated spaces that people can easily find, and share updates and news!

● Develop materials. Spend some time creating materials that speak to your various audiences Develop 1-2 page documents with the basic details about what you are doing, how and why you are doing it, as well as the requirements for joining the system You can easily upload these documents to your website and distribute them wherever you go.

● Develop short videos. Create 2-3 minute videos explaining your license or franchise system You don’t need to invest a lot of money or even outsource them, just ensure you have enough clear information written down, and nice slides with visuals

● Schedule webinars. If you are finding that a lot of people are interested in the details about your license or franchise system, schedule 1-hour webinars once a quarter and use existing channels to advertise them. Give a more in-depth explanation of the system, its benefits and how to join it Be ready to follow up with all the inquiries you are likely to get after such an event.

● Networking. You may find prospective cooperators in conferences, industry specific, franchise conferences, or worker cooperative conferences Use the time to network with others, find ways to talk about what you are doing, and have materials ready to share Word of mouth is very important in developing your pipeline.

● Other. Can you think of other spaces you may want to be in, or materials you may want to create?

As with any potential business client, make sure you develop systems to track data and measure your lead generation campaigns, to know which channels and/or strategies are the most effective

Finally, remember that you will need to foster strong relationships before any cooperator joins your system. New cooperators signing a franchise or license

agreement will be part of your work for the long haul, so get to know them first. Develop a rubric to gauge their interest, ability to launch a new business, alignment with your values, as well as your level of comfort welcoming them to your cooperative family See Appendix D for a sample list of interview questions you could ask potential cooperators. Be mindful of how many franchisees you consider taking on at once, particularly when you are starting up Franchise experts recommend that you do not add more than one or two franchisees in your first year.

Steps for licensing

If you plan to use a licensing model, which means that you do not intend to have as much control over elements of the business as you might in a franchise, then you will need to develop a licensing agreement A licensing agreement describes the relationship between the licensor and the licensee. It allows the licensee to use and/or earn revenue from the property of the owner (licensor) The licensor typically earns royalties for allowing another party to use its copyrighted, trademarked or patented material. The following are key considerations for a licensing agreement:

● Grant of Rights. Make sure you are clear on what intellectual property you are licensing to the licensee cooperative.

● Geographic region. What’s the geographical region that you will allow the licensee cooperative to use the licensed material?

● Time period. For how long will the license agreement run?

● Exclusivity. Determine who will have rights to use the intellectual property Most likely, you will plan to continue using the IP, in which case, the main question is whether the licensee will be the only cooperative that can use the IP other than your cooperative (called a sole license), or do you anticipate licensing the IP to more than one cooperative (called a non-exclusive license)?

● Limitations. Will you specify how the licensed IP must be used? Requiring that the licensee use symbols such as ™ or ® will help protect the IP You might specify that the license be used in relation to specific services If a 501(c)(3) tax-exempt entity holds the IP, then you might want to make clear that the services must be in furtherance of a specific mission that falls under the tax-exemption category.

● Payment. Will there be a one-time payment, will you have ongoing royalties, or a combination of both? How will you determine a one-time, upfront payment amount? If you have royalty fees, will it be based on a percentage of net sales or something else? How often will payments to you be due?

● Termination. Under what circumstances will the agreement terminate? You would include a list of events that give rise to termination such as not paying royalties (if required) and/or if the licensee business goes bankrupt.

Stepsforfranchising

If you decide to franchise your cooperative or elements of your business model, then it is imperative that you work with an attorney who specializes in franchise law Franchise laws are complex, and you will need the support of a lawyer who will help ensure that you are in compliance As we discussed in Section 1, each state has its own definition of what qualifies as a franchise and its own requirements for what a franchise must do in order to operate You can find a list of states and their requirements here.

In Section 1 we discussed the factors that qualify a business as a franchise under the Federal Franchise Rule. Here we will discuss in more detail what goes into a franchise agreement, a franchise disclosure document and an operating manual We will also talk about ways to adapt standard franchise practices so that they better suit a worker cooperative franchise That is, we highlight how you can create a franchise that gives franchisee worker owners democratic worker control, autonomy and independence One big difference to note up front is that in a typical franchise system, there is usually not much negotiation that takes place between the franchisor and the franchisee The usual approach is “take it or leave it” As a cooperative committed to cooperative principles and building out a broader cooperative ecosystem, you will likely find yourself taking on a more of a, shall we say, cooperative approach to setting up and negotiating a franchise system. However, you should keep in mind that maintaining the quality of the brand must be a top priority–you should consider what controls you need to put in place so that the brand maintains its quality and thus benefits everyone

FranchiseAgreement

The franchise agreement is an important legal document that establishes the legal relationship between a franchisor and a franchisee It grants the legal right to a franchisee to establish and operate a franchised outlet. The franchise agreement gives the franchisee a license to use the franchisor's trademarks, trade dress, business systems, operations manual and sources of supply in offering and selling products and/or services the franchisor designates A franchisor must disclose the franchise agreement in its franchise disclosure document.

The franchise agreement contains the obligations of both parties It spells out the areas of operations over which the franchisor will have control or the right to control the franchisee For a franchise system with worker cooperatives as the franchisor and the franchisee, you will want to pay close attention to the terms of the franchise agreement and determine where you might give a cooperative franchisee more leeway and control than in a standard franchise, keeping in mind protection of the overall brand quality

In Appendix A, we list the key terms of a franchise agreement and discuss what to consider in making them more coop-friendly than standard franchise terms which largely favor the franchisor

FranchiseDisclosureDocument

The Federal Franchise Rule is a federal law that covers all of the states, so if you meet the requirements for disclosure under the Federal Franchise Rule, then you must put together a franchise disclosure document (FDD) and distribute it to prospective franchisees at least 14 days before offering or selling your franchise so that a prospective franchisee has time to review and evaluate its contents before deciding to purchase the franchise. A lawyer would draft this in consultation with you. As you might recall from Section 1, the purpose of the FDD is to give enough information to prospective franchisees to be able to evaluate the benefits and risks of joining the franchise Appendix B breaks down the contents of a Franchise Disclosure Document and includes questions to guide you in determining what you will provide to and require of a franchisee cooperative

OperationsManual

You will provide an Operations Manual to your franchisee that contains detailed information about your franchise system standards, operating procedures, suppliers and requirements for the development, marketing and operations to set up a new business The purpose of the Operations Manual is to make sure others can use it to start a worker cooperative that outwardly functions just like you.

You will mostly start with some information contained in your membership manual, or other internal operating procedures, and make additions to comply with general franchise requirements Your Operations Manual will offer your best practices, your know-hows and the minimal requirements to operate the business so all customers’ experience is similar across franchisees It will be very important to make it as clear and comprehensive as possible.

We want to emphasize that the Operations Manual is a guide; it can’t dictate how the franchisee decides to operate internally This internal-external distinction is important, particularly for worker cooperatives. The hiring and firing of worker owners, membership requirements, profit distribution, decision making and overall structure of the worker cooperative are up to the individual business. The franchisor doesn’t have any way to dictate internal operations, nor is it in its interest to have that level of oversight. As the franchisor, you will not be the employer of the new worker cooperative

Your Operations Manual should be written simply, imagining that the audience may not necessarily have your business industry knowledge. Take time fleshing out your Operations Manual. It is a requirement for running your franchise business, and the success of your system depends on your ability to explain the value of your business

and how to replicate it. See Appendix C to review a sample table of contents for an Operations Manual

Developthesystems(infrastructure)tooperateyourfranchise

As has been discussed in other sections, adding a franchise system requires developing adequate infrastructure to operate it Below is a table with some considerations by area and timing of your franchise system journey.

A team needs to develop a system to develop a pipeline of prospective franchisees and create a rubric to assess interest, experience, how aligned the group may be with yours, and how much of a lift it could be for your franchise system: for example, if the prospective franchisee is a new registering state that would require you to re-register.

You will need a strong Customer Management System (CRM) to track and field inquiries, follow up with those interested in the franchise, assess their readiness, and prepare them to talk to your legal team We recommend developing a rubric to assess interest, experience, how aligned

Develop infrastructure to receive feedback from franchisees as well as foster a sense of connection and collaboration among franchisees You may develop committees over time

Finance

You will need to have systems to determine the financial feasibility of bringing on a new franchisee. Will you do that in-house or will you do this externally?

Finance will need to develop systems to track and collect fees and monthly reports, as well as to analyze their business growth. You should always know how franchisees are performing, and offer support when they are not meeting projected goals

Location If you have a brick and mortar Your team should incorporate

Marketing

business, your team should develop a strategy to help find a location that meets your territory, operational requirements and is consistent with the findings from your market study

If you don’t have a strong brand already, you will need to invest in positioning your brand, creating a logo, website and collateral material. Internally, you will need to invest in data analytics to understand how your overall brand is doing.

site visits to all new locations at least once per year for 1-2 years after their opening

Legal & Compliance

Your team will need a franchise lawyer to prepare the franchise agreement when you are ready to offer the franchise If you are entering a new state, you will need to meet the requirements

You need marketing infrastructure to position your brand. You will need a staff designated to manage the website, develop collateral material, oversee and approve requests from franchisees, and oversee the adequate use of the brand.

You need a system to track all your franchisees’ information in order to go through the yearly franchise renewal process You need to have a way to keep yourself as the franchisor and the franchisees accountable to what is contained in the franchise agreement. Develop tools and systems to know what is in your franchise agreement and spaces for feedback and dialogue.

Training

A team can develop and offer information sessions to share how the franchise works, what the benefits of it are as well as the requirements This team may work with the sales team on developing the pipeline

After the signing of the franchise, the franchisor needs the right infrastructure to train new franchisees on all the franchise systems You will need to offer the initial franchise training described in the franchise disclosure document

Additionally, you will need to continue checking in with franchisees to gauge their ongoing training needs, which

may include: how-to operationalize the business model, or how to establish and reach financial projections, develop marketing strategies, etc

Offeryourfranchise

Once you have a franchise disclosure document, operations manual, franchise agreement and all the other necessary components for your franchise, the next step is to formally offer the franchise to your prospective franchisee There are very specific federal and state laws around when you can offer the franchise. In some registration states, you cannot offer the franchise until you have filed and registered with the state Again, be sure you follow specific instructions from your franchise attorney on how and when to offer and sell the franchise.

When you are in the clear to formally offer the franchise (with all of its hundreds of pages of documents), you can think about what role you will take in helping to inform your prospective franchisee about what is in the documents. The franchisee should have their own legal counsel to advise them, but you can approach the overall situation collaboratively with the aim of making sure they fully understand the relationship they are entering into, the expectations you have of them and them of you. You should also consider how much you are willing to negotiate the terms in the franchise agreement, particularly because the terms need to apply to the entire system, so if you negotiate specific clauses with a franchisee, then all franchisees need to be notified of these changes It is helpful to share underlying concerns such as maintaining the integrity of the franchise brand so that the franchisee can understand where you are coming from on terms that you feel you cannot change Depending on the approach you take, the offer can take anywhere between 2 weeks and 2 months.

Overviewoffranchiseofferingprocess

The journey to launch a new franchisee includes various elements. In the chart below, we describe the roles the franchisor and prospective franchisee may take in the process of joining the franchise system.

A few notes about this journey:

● The franchisor is responsible for assessing the financial viability of a new location, including market needs, and legal requirements to operate a new franchisee, particularly if outside the initial registering state.

● A prospective franchisee needs to have an incorporated entity before signing the franchise agreement.

● After the franchise offering and participation in the franchise training program, the franchisee works towards launching their business, with technical assistance from the franchisor, as determined in the franchise agreement

5.FranchisingandLicensing:LessonsLearned

In this section we will unpack some of our lessons learned in supporting groups with licensing and franchising expansion projects The goal is to help you get a better understanding of the challenges and benefits these two models present in a worker cooperative context

Establish clear roles and expectations. In franchising, the roles and responsibilities of the franchisor and franchisee are clearly defined in the franchise agreement. The system can offer a very granular level of clarity. That said, the language in all the documents can be difficult to understand, so you will have to work to really understand what each document says, as well as how to share the information in an accessible way to prospective franchisees Additionally, it is very important to know in advance who your partners will be, what they will be able to offer franchisees, before and during their involvement in the system By contrast, a licensing agreement can be whatever you need it to be, so you will have to be very intentional about setting up clear roles and expectations for you as the licensor and for your potential licensees. The system is very loose, so you have to know in advance what you will or will not provide If you don’t have clarity, the cooperatives in your network will struggle to see the benefits of the system, and may expect more than what you are ready or able to provide

Expect to seek and pay for expert technical assistance. Franchising is a highly regulated field. You will need to have specialized consultants to help you meet requirements: from operational requirements such as having an operations manual, to legal requirements like drafting your Franchise Disclosure Document.

You might not have access to lawyers or consultants who understand cooperatives, so you might prepare to do a fair amount of educating and/or seek attorneys who have cooperative experience and can help support Finding a franchise attorney who has worked with cooperatives is even more rare (we only know of one!), so don’t be afraid to question or push back on what they tell you is standard Ask what the law requires versus what is generally done in a typical franchise. Just because something is generally done one way does not mean that you have to do it that way for your cooperative franchise so long as you would still be in compliance with the law. You want to find lawyers and consultants who are creative and are willing to put in the effort to understand what your cooperative is, how it works and what you are seeking If you are developing a licensing agreement, you should still work with an attorney who can help you think through your goals, to ensure you stay within a licensing framework

Find industry experts. This may be an obvious element to have when considering franchising or licensing, but oftentimes those who initiate the expansion efforts are not industry experts. If you don’t know enough about the industry, it will be very challenging to meet the requirements for expansion Can you accurately calculate revenue projections for potential new locations? Do you know your systems and can you teach your systems to others? If the answer is no, then you will struggle to develop tools and systems to aid the replicability of your business. More importantly, you will not be able to ensure the success of those wanting to replicate elements of your model.

Plan for manageable system growth initially. It’s important to find the right balance in the growth of your system You will have to figure out how many franchise offerings you can make in a year without overwhelming your infrastructure. Starting with one or two cooperatives joining the system in the first year can give you enough information about your legal documents, the system’s infrastructure, and how you will manage the relationships to your licensees or franchisees. If you do more than that, you will likely find yourself not being able to manage all the pieces, and failing to comply with your own standards and procedures.

Adapt conventional models to cooperative ownership. Franchising and licensing are systems that were created as business opportunities, and like many other business development efforts, don’t center worker ownership. However, you can make adaptations to make these structures function for you and your goals Read Appendix B to learn what you may want to adapt in your FDD to weave worker ownership into your system

Match the control and oversight of the system with the responsibility to deliver value. The challenge with franchising and licensing is that for all the procedures you incorporate in your franchise agreement and operations manuals, you will need accountability mechanisms. The licensor and franchisor have to be ready to implement everything all parties have agreed to, and it’s a tremendous responsibility. There is a power imbalance set in the system, but you have to make sure you are as invested in delivering value as a franchisor or licensor, just as you have expectations of licensees and franchisees Control of the brand will require intentional strategies to ensure all franchisees feel like they are part of something bigger such as developing systems for franchisee input

Incorporate democratic decision-making structures. There are no requirements for a franchisor or licensor to be the sole decision makers in a system. It is possible to set a more democratic decision-making structure that aligns with your values and goals. You can engage with franchisees or licensees for their input, feedback,

discussion, and for more collaborative elements. You can set a structure for franchisees or licensees to seat on committees, and/or your board

Develop adaptable infrastructure & system management tools. Develop infrastructure early on, but don’t create overcomplicated systems. Be lean at the start, pilot systems and get feedback for future iterations Start with technology that works for you, but keep in mind that you will continue to grow. Dedicate time to managing your system, keep files and documents up to date and work with your licensees or franchisees in developing systems and a rhythm for complying with their monthly reports

Be clear about the ownership of the franchise or license model. If a cooperative developer is starting a franchise or license system, it’s important to have clarity about the ownership of the intellectual property If the franchise or license is owned by the nonprofit cooperative developer, we recommend that roles and expectations are set from the start, particularly as it relates to an exit strategy. Will the nonprofit cooperative developer own the system in perpetuity, or is it a strategy to incubate a model for the development of worker cooperatives for a period of time? What happens after the cooperative developer nonprofit organization exits? Where will the franchise or license system live and who will maintain it? These questions must be answered before you begin a process of creating a franchise or license system, and be communicated with prospective licensees and franchisees.

6.FranchisingandLicensingExamples

Brightly®

Brightly® is a franchise of worker-owned cooperatives that offers eco-friendly residential and commercial cleaning services. Publicly launched in 2019, the Brightly® franchise was developed by the Center for Family Life’s Cooperative Development Program. Brightly®’s mission is to expand worker ownership among low income communities by lowering the barriers to starting and growing a successful business and making the business startup process simpler. Brightly® cooperatives have a shared brand, industry-specific tools and training, and access to a network of like-minded cooperators.

The Center for Family Life (CFL) is a 501(c)(3) tax-exempt nonprofit organization located in Sunset Park, Queens, New York CFL’s Cooperative Development Program has incubated worker cooperatives since 2006. Using a high touch6 and holistic approach to supporting immigrant communities starting their cooperatively-owned businesses, CFL has developed over 25 worker cooperatives in the domestic work sector, and since 2016, it has focused on the residential and commercial cleaning industry.

CFL started doing research on how to expand worker cooperatives a few years before launching the Brightly® franchise. There were a few factors that prompted this research First, CFL’s team knew that small startup cooperatives were facing barriers to becoming profitable and sustainable business such as creating a recognizable brand and acquiring new clients, developing strong operational systems, and reaching break-even in tight margin industries. Second, as a place-based incubator, CFL’s team was not meeting the demand of hundreds of community members interested in joining or starting their own businesses because the development of each cooperative was taking over a year to get to launch, and up to eight years for some cooperatives to take their operations outside of CFL.

CFL’s team researched existing models that were successfully scaling worker cooperatives, including Mondragon, the Arizmendi Association, Evergreen Cooperatives, among others. At the same time, the team started attending the International Franchise Conference in NYC to learn about franchising as a relatively cost-effective strategy for business growth.

6 High touch cooperative developers “may invest financial capital in the business They may buy equipment or property, fund and manage construction, or provide working capital for the startup period They take on greater risk.” Democracy at Work Institute, Worker Cooperative Development for Scale (2016). Page 43

Why a franchise model?

The initial intent was not to create a franchise, but to explore pathways to achieve the following:

● Create a scalable model that could make worker ownership more successful for low-income communities;

● Lower the financial risk of starting cooperative businesses for low-income communities;

● Create a strong network of cooperatives, gaining efficiencies and operating outwardly as a big company, while remaining small businesses; and

● Ensure the model is sustainable over time.

As CFL learned about existing models, and started talking to franchise lawyers, the team realized that the key features they wanted for Brightly® would qualify the model as a franchise under franchise law, namely, the model would meet all three franchise requirements because:

a) there would be a shared brand;

b) there would need to be some level of control regarding industry standards; and

c) to make it sustainable, there would be royalty payments.

Once the franchise model was settled on, CFL hired consultants to develop the brand’s operations manual CFL also worked with franchise and cooperative lawyers to review the standard Franchise Disclosure Document and in order to adapt it to a worker cooperative framework

How is the Brightly® franchise structured?

The Brightly® franchise is owned by Coopportunity, Inc., a 501(c)(3) nonprofit organization Being a 501(c)(3) organization allows Cooportunity to maintain the social mission of expanding worker ownership to immigrant and other disadvantaged communities, while also allowing the structure to finance its expansion through grant funding

Coopportunity is governed by a board of directors elected from the community of worker owners and allies in the cooperative movement. As Brightly® central, Coopportunity is charged with managing the franchise, including providing for shared back-office services, brand research and development, systems development, franchise compliance, financial management, training and expansion projects

Brightly® has an industry committee composed of representatives from all Brightly® coops who meet regularly to discuss matters connected to workers’ experience in the industry Because worker owners are industry experts, the industry committee

market size, transportation, legal infrastructure and the cooperative ecosystem If the initial assessment is positive, a more robust feasibility study is done to ensure the success of the businesses in that new area The next step is to secure grant funding to source the initial incubation of a local cooperative. There haven’t been instances yet where the local partner is also an experienced cooperative developer The local community-based organizational partner participates in a six-session training where they learn fundamentals of cooperative incubation in immigrant communities After a six-to-eight month period of developing the new cooperative, Coopportunity offers the franchise agreement to the cooperative in order to become a member of the Brightly® franchise. The cooperative then negotiates the agreement with Coopportunity, and when ready, signs it

What do Brightly® worker owners say about it?

We interviewed two worker owners from two different NYC Brightly® cooperatives and asked them questions about their experience becoming worker owners, what being part of the Brightly® franchise was like, and questions particular to the meaning of ownership and control of their Brightly® cooperative.

Below are some of the findings from those conversations:

● Shared brand and identity. Both members expressed how important it was to have a recognizable brand, and how their services connects them to other Brightly® cooperatives: “Our brand has prestige and we have to represent it, our cleaning services are of the highest quality,” and “when we go out to do work, we have to do it well, because our brand will be identified”

● Belonging to something bigger. One member shared pride in being part of her cooperative and a franchise that is expanding To her, it offers an opportunity for her future, “I like that we are expanding to Philadelphia, if I am not in NYC, I can go there,” implying she could join a Brightly® cooperative in a different city.

● Ownership and control. Both members felt ownership of their cooperative business, talking about the details of how they make decisions, “we have quorum individuals can’t make decisions for everyone, we have equity and democracy.” However, there were some differences in opinions regarding the role of the Brightly® franchise in their cooperatives While a member shared that “we basically make our own decisions, we may get some advice…to do this or not do that I don’t think they interfere,” another connected the relationship to the Brightly® franchise via the royalty payments, “all our jobs come through the franchise, so we have to pay royalties on all our income,” which she felt was control over her business.

● Benefits of the Brightly® franchise Some of the benefits of belonging to the Brightly® franchise both members shared included: receiving workshops, technical assistance and having a strong brand for their businesses Additionally, one member shared being able to have support in difficult times as a startup business, “in the pandemic, we couldn’t cover the cost of our liability insurance, so the franchise covered that”

● Brightly® franchise buy-in. It seemed like both members had bought into the franchise model, one member from a newer Brightly® shared she enjoys representing the franchise at events and doing anything she can to uplift the brand Both members have a good understanding of the structure in the Brightly® franchise, but both shared they needed to learn more about all the details of how the franchise is run, and what happens with royalty payments

Lessons learned from Center for Family Life developing a franchise model

● Need for an exit strategy. Right now, there is not a clear path for CFL to exit the franchise project in the short term CFL is working on setting specific

benchmarks to help determine when it would responsibly reduce its involvement in the project including determining how the projects can achieve financial self-sustainability.

● Discuss standardization versus self-determination often and in early stages of development. The franchise concept relies on a certain level of standardization of its processes, particularly in pricing ranges, job assignments and customer service. Worker owners might not have self-determination in every aspect of the business This can create tension between members of the cooperatives and the developers. Early introduction of the standardization of processes within the franchise system and explaining why this is the case would help mitigate this tension. It also requires innovative democratic processes for members in all cooperatives to participate in defining the standards for the collective.

Radiate Consulting®

Radiate Consulting® is a brand and model incubated by the Democracy at Work Institute (DAWI) as part of their Rapid Response Cooperative (RRC) Development Project DAWI currently owns the registered trademark Radiate Consulting® , and it licenses the use of the name to cooperatives made up of members of underrepresented communities The cooperatives provide a variety of consulting services.

In 2016, DAWI brought together a group of cooperative developers, worker owners and organizers to get a better sense of the trajectory and interest in growing immigrant-led cooperatives In partnership with the US Federation of Worker Cooperatives, DAWI facilitated a cohort of Líderes Cooperativistas en Acción, to support immigrant leaders in worker cooperatives across the country

When the Trump administration started threatening immigrant communities and in particular DACA recipients (Dreamers), with threats to end the program, DAWI realized there was an opportunity to support immigrant communities through a quicker, simpler pathway to worker ownership. Through cooperative participation, immigrants who may not be eligible to work as employees could continue to be a part of the workforce as owners of their own business. DAWI learned from organizers developing rapid response efforts for Dreamers as they prepared for potential deportations. They adapted the approach and borrowed from other existing models across the country to build the new Rapid Response Cooperative model The two elements designed to make the model more rapid are: (1) a standardized toolkit with vetted documents, and (2) the defined “special member” role of a partner organization that recruits founding members and builds a protected market for the new business.

Initially, the model was developed in support of Dreamers who were graduating from college and needed to enter the workforce and faced the looming threat of not being able to renew their DACA status. Over time, the model evolved to not only working with Dreamers, but to other workers facing various challenges entering the workforce and who could provide consulting services.

At the end of 2022, there were six Radiate Consulting cooperatives with 31 members operating in 4 states: New York, California, North Carolina and Colorado

Why a license model?

DAWI was interested in a low-touch7 approach to expanding worker cooperatives to support a growing need from the community of Dreamers across the country.

Licensing presented a good fit because:

● It doesn’t have many legal requirements to set up or maintain year-to-year, including no requirement to register with the state;

● It can function with simple, straightforward guidelines;

● It protects a shared brand (the registered trademark Radiate Consulting®;

● It allows for diversity in the services each licensee can offer, not everyone has to provide the same service, or even provide services in the same way; and

● Its flexibility allows for the addition of shared services based on need and over time.

The Radiate Consulting® Guidelines all cooperatives agree to when joining the network include the following clauses:8

● Provide consulting services from a list of approved services, register their business and apply for a doing business as (DBA) certificate to operate as Radiate Consulting® , and abide by the brand parameters (logo, fonts, consistent visuals and messaging);

● Sign an annual Trademark License Agreement;

● Meet marketing requirements, like using the radiate.coop’s website and abide by social media parameters;

● Join the US Federation of Worker Cooperatives; and

● Have a special member during the startup year (or up to 18 months) (typically the cooperative developer supporting the incubation is the special member).

How is Radiate Consulting® structured?

The Democracy at Work Institute owns the trademark Radiate Consulting® and licenses it to LLC cooperatives. DAWI partners with organizations across the country for the development of new Radiate cooperatives. When they launch, Radiate Consulting® cooperatives operate independently from each other, and have autonomy over their onboarding processes, setting up prices for their services as well as their profit distribution, and the ability to update their operating agreement and membership manual.

As a Radiate Consulting® cooperative, they have access to the following:

7 Low touch cooperative developers “play the role of coach to the business and its members, guiding and encouraging them to build a cooperative for themselves The developer's primary investment at this end of the range is time” Democracy at Work Institute, Worker Cooperative Development for Scale (2016) Page 49

8 Radiate Consulting Guidelines, shared by the Democracy at Work Institute.

● Trademark Licensing. Brand, logo, name, risk management, and quality control.

● Communication Vetted and shared messaging

● Shared Purchasing. Website host via Squarespace, .coop, domain, Google Workspace

● Training & Professional Development. Geared towards worker owners and member-administrators:

○ Bi-monthly training about democratic management, industry-related topics, consulting, etc

○ Coaching is provided upon request.

● Community & Network All Radiate Consulting® worker owners will be connected to share contract opportunities, provide peer support and business lessons, and share a sense of pride for the Radiate brand

● Data collection & sharing. All Radiate Consulting® cooperatives share their data in an annual survey, participate in analyzing it, and have access to the results to help guide their planning

While these services are part of the guidelines, DAWI is working to test and strengthen some of its shared systems:

● Cross-coop contracts sharing Radiate Consulting® cooperatives are beginning to share contracts, increasing their ability to go for larger contracts that they would not be able to do on their own

● Shared operational system. DAWI is testing how to have shared operational systems They began with a simple Google Workspace joint account that all Radiate Consulting® cooperatives can use, but they are researching how to incorporate an attorney, marketing and bookkeeping as part of the network services.

● Group trainings DAWI conducts yearly assessments with the Radiate Consulting® cooperatives to determine which trainings cooperatives need and offers these quarterly Some topics have included marketing and coaching

DAWI measures the individual co-op’s success through a number of means. They track yearly data on revenues, amounts in internal capital accounts, profit distribution, number of contracts relative to the desired amount of work, and metrics intended to measure the impact of worker ownership on the livelihood of each owner.

How does Radiate Consulting® expand to new places?

The Radiate Consulting® model relies on partners interested in bringing this approach to their particular community. A feasibility study is conducted by the local partner (and sometimes with the support of DAWI) to assess the potential for the consulting business in that area and sometimes they create a business plan, depending on the location and type of consulting business being considered Once

it’s feasible to start a new Radiate Consulting® , the cooperative developer, who can be the local partner or DAWI, helps the cooperative form utilizing DAWI’s Rapid Response Cooperative Toolkit, and stays as a special member during the Startup year (or up to 18 months after launch) The special member role includes preserving the business mission, educating members and running the business with them during the Startup year

What do worker owners say about it?

We interviewed two worker owners from two different Radiate Consulting® cooperatives and asked them questions about their experience becoming worker owners, what being part of the Radiate Consulting® network was like, and questions particular to the meaning of ownership and control of their Radiate Consulting® cooperative.

Here are some insights from our conversations:

● Ownership. For both members, ownership of their Radiate Consulting® cooperative was very important Both expressed having a voice in how decisions are made in their business, “I feel like I do [have a sense of ownership] especially because what makes [our cooperative] stronger is my voice, my opinion”

● Benefits of the Radiate Consulting® model. Responses were varied, most likely due to the sequencing in the development of their cooperatives in relation to the other, for the member of the first Radiate Consulting® cooperative, the benefits are similar to those of cooperative ownership: flexibility to do the work, being their own boss, negotiating their own rate, getting support from their peers. In contrast, the member of a later Radiate Consulting® cooperative mentioned the following as benefits of the model: “Everything is set out for you, the Operating Agreement, business model, legal support,” demonstrating a more robust infrastructure developed over time. This member also mentioned the 10k startup grant their cooperative received from DAWI as being a benefit of the model

● Challenges of the Radiate Consulting® model. Members expressed wanting their cooperatives to have more members so they could distribute some of the managing and governing tasks across more people The second challenge was the difficulty finding contracts and not having support to grow their businesses. While the Radiate Consulting® cooperatives share a brand, the hyper local nature of their client base is not allowing them to build a strong local presence.

● The role of the developer. DAWI was the cooperative developer for both of these Radiate Consulting® cooperatives. DAWI’s role was critical in the development in both of these cooperatives, “DAWI is the incubator” and “DAWI is Radiate,'' is how members categorized DAWI’s role. Both shared the importance of their role in helping with the model, how to start it, how to acquire the license, support with the initial trainings, and in particular, one member shared that DAWI is an “extremely supportive and helpful relationship”

● DAWI’s control in their cooperatives. In both conversations, members seemed to understand that in their case, DAWI had the role of the special member, having formal control in their startup months: “they attend all our meetings, and now they come quarterly when our cooperative discusses our financial position,” and “they have one vote in meetings, and veto power on some things, like budgets”

● Overall Satisfaction. There is a good level of satisfaction and comfort in their cooperative business While both members expressed not knowing what it was going to be like to be a member of a Radiate Consulting® cooperative, they are excited about expanding their services and membership in the coming years

Lessons learned from the Democracy at Work Institute developing a Licensing model

● Have clarity about the elements you think are important to control for the success of the model. It’s important to be able to determine the parameters for engagement with the license model, as well as what licensees have control over and where there is flexibility The elements you want to control should be informed by what your organization does, its mission, its long term investment in the project, and a consideration of what changes you see occurring over time

● Build a strong brand and value proposition from the start. Having a strong brand can help member cooperatives feel a connection and identification with the brand, and with each other. With a strong brand, worker owners may feel more excited about sharing it with their clients and to talk about it with pride

● Establish mechanisms for engagement early on. Involving member cooperatives in decision making can help build buy-in and trust in the system, and help shape it. Member cooperatives could be part of governance and financial discussions to identify milestones, when ideas about shared systems or processes come up.

7.Appendices

AppendixA:KeyTermsofaFranchiseAgreement

Here we pose questions for you to consider when developing the main provisions of a franchise agreement We also address in certain places how you might make them more coop-friendly than standard franchise terms which largely favor the franchisor.

1. Initial Franchise Fee. Will you have an initial franchise fee–a fee that you charge a franchisee for purchasing the right to franchise the business? You may decide not to charge an initial franchise fee, depending on your overall goals and financial plan

2. Royalties. Will you have ongoing fees that the franchisee cooperative will pay? How frequent will the payments be due? Weekly, monthly, some other frequency? How will you calculate the royalty amount? The most common way of doing so is by a fixed percentage of the monthly or weekly gross sales. You could have a fixed dollar amount or some other structure that you define in your franchise agreement.

3. Marketing. Will you mandate that the franchisee pay a fee for marketing which typically goes into a brand development fund? Will you require a minimum amount they must spend per month (or some other frequency) on local marketing? Will you require your approval of all marketing and promotion (including digital media) of the business and that it must conform to standards that you specify?

4. Term. How long will the franchise relationship last before it is up for renewal, if you include a renewal option, that is? Franchise agreements typically grant rights for ten years, but you and/or the franchisee cooperative might find that term to be too long and want to shorten it initially. The term should allow enough time for the business to get off the ground, get settled into operations, generate revenue and become familiar with the franchisor-franchisee relationship.

5. Territory. Will you grant a franchisee a specific territory to operate and guarantee that you will not allow other franchisees, or your cooperative, to operate there? Or will you not carve out territories for franchisees and instead leave it open? When thinking about territories, you should also keep in mind any sales goals you had conveyed to the prospective franchisee when you were recruiting them to become a franchisee If you projected sales, were they based on the territory you planned to give the franchisee? If you leave the territory open, are you okay with potential competition amongst your cooperative and the franchisee(s)?

6. Operations. Will you require the franchisee to stick to using systems and procedures that you specify? Will you require them to offer and sell only products and services that you authorize? To the extent that you seek uniformity from your franchisee, you would mandate specific requirements If there is flexibility in how

the franchisee cooperative operates, you might not choose that it adheres to systems, procedures, products and/or services that you specify

7. Training. Will you require the franchisee cooperative to undergo training before starting operations? Will you specify the training program? Will there be a training fee that the franchisee must pay?

8. Restrictive covenants and non-competes. The sections in the franchise agreement that are called restrictive covenants are meant to protect the confidentiality of the franchise system and to prevent franchisees from establishing competing businesses both during the term of the franchise agreement and after the agreement ends. During the term of the franchise agreement, the franchisee agrees that it will not establish, operate or participate in any competing business. The post-termination clause says that, for a certain period of time after the end of the franchise relationship, the franchisee cannot establish, operate or participate in any competing business. If one of your overall goals, particularly if you are a cooperative developer, is to promote worker ownership, you might consider restricting the franchisee from opening a conventional business for a certain period of time after the end of the franchisee relationship, but keep open the option that they operate as a worker cooperative

The idea behind doing this is to dissuade a cooperative from using the knowledge it gained from being a franchisee to start a conventional business that is not worker owned and instead promote worker-owned businesses. In general, pay careful attention to standard non-compete clauses and make sure they actually apply to your goals. You might not be interested in prohibiting people from making a livelihood through the same type of work that the cooperative does

9. Termination. The termination section of a franchise agreement breaks down events that give rise to termination. There are multiple ways that a termination might happen and include automatic termination by an event that triggers automatic termination such as the franchisee becoming insolvent (when it does not have money to make payments or debts exceeds assets), filing for bankruptcy and dissolving. Another category of termination is termination by the franchisor after the franchisor has given written notice to the franchisee This includes events such as the franchisee breaching a material term (that is, a significant aspect) of the franchise agreement, failing or refusing to pay the royalty fee after a specified number of times, maintaining records that are misleading, fraudulent or inaccurate or disclosing the operations manual or any parts of it to unauthorized persons. A termination clause might also include the franchisor’s ability to terminate the franchise relationship if the franchisee or owner of the franchisee is convicted of or pleads guilty to a felony or crime. In the case of an owner being found guilty of a felony or crime, the ability to terminate might only kick in if the owner is not expelled from the business within a certain time period after the conviction or guilty plea. Your cooperative should review the standard language and determine what it wants to keep or change For example, cooperatives we

have worked with have included language that excludes offenses related to immigration status from the clause on felonies and crimes Lastly, there are events that lead to termination only after a franchisor has given the franchisee written notice that the franchisee has defaulted on some part of the agreement and has not corrected that default within a stated time period. A franchisee, on the other hand, tends to have fewer opportunities for terminating the agreement than the franchisor. Typically, a franchisee must give a franchisor a period of time to correct any material breach of the agreement before it has the right to terminate.

10. Renewal. Will you offer the franchisee the right to renew the franchise at the end of the franchise term? Will there be a fee that they must pay in order to do so?

11. Personal liability. Franchise agreements typically require individuals to personally guarantee that they will adhere to the requirements in the agreement or be personally liable. For example, if the franchisee breaches the franchise agreement by not paying the franchisor as stated in the agreement, then the franchisor can go after the individual, not just the business entity, for the funds Another example is sharing confidential information–doing so can result in personal liability You should consider whether or not you wish to have personal liability for the member-owners of the franchisee cooperative. Cooperative developers looking to promote ownership amongst low-income or otherwise marginalized individuals might want to consider changing the typical provisions, or limiting personal liability only to sharing of confidential information, to not scare off prospective worker owners.

12. Managers. Operating Manager. Owner. There are a few terms in a typical franchise agreement that need special attention if you are a worker cooperative, as your structure might not match that of a more conventional franchisee. A franchise agreement will have special requirements for managers, operating managers and owners. Does the franchisee cooperative have managers? Pay close attention to how the terms are defined, understand the intention behind the definitions and the places in the franchise agreement that pertain to those defined groups, and see what you need to alter so that it applies in a cooperative setting.

13. Reporting requirements. How much time will you allow a franchisee to provide you with reports such as profit/loss statements and balance sheets? Will you charge a late fee for late reports?

14. Right to inspect. Will you reserve the right to inspect the franchisee cooperative’s operations and its books and records? This is usually limited to business hours and can occur without prior notice

15. Dispute resolution. Consider including mediation as a first method of resolving disputes. Mediation allows for both sides to meet with a neutral person who will assist in helping the sides negotiate their differences The mediator does not

decide on the outcome of the matter but can help the parties draft an agreement if they reach one You might consider requiring arbitration if mediation does not resolve the issue. In arbitration, there is a neutral third party who hears both sides and makes a binding decision Arbitration is typically faster and less costly than pursuing litigation (bringing a case in court).

This appendix breaks down the sections of the franchise disclosure document (FDD) so that you understand what goes into it We also pose questions for you to consider.9 The FDD is a summary of the main points of your franchise agreement, so some of the items already discussed in the franchise agreement section and appendix also appear here.

1. Item 1 - The Franchisor. The first item in an FDD is information that you give about your business. You will share your cooperative’s history and structure. You will also disclose what the business opportunity is that you are offering, information about any affiliates you have, the market in which the franchised business operates, whether or not the business is seasonal and any laws specific to developing or operating the franchised business.

2. Item 2 - Business experience. Here you will share information about specific individuals involved in the franchise, typically those who are managing it including directors, trustees, general partners, principals officers–anyone with management responsibilities and upon whom a prospective franchisee would rely for their expertise, formulation of policy or control of the system in making an investment decision The disclosure should include each person’s past five years of employment history.

3. Items 3 - Litigation. Disclose any current or previous litigation in which you are involved

4. Item 4 - Bankruptcy. Disclose whether you have ever filed for bankruptcy.

5. Item 5 - Initial fees. You must disclose all fees that a prospective franchisee would pay before the franchisee can open the franchised business Will you charge an initial franchise fee? Will there be fees for opening inventory and equipment? Will any upfront costs be owed in a lump sum or can the franchisee pay in installments? The initial fee is typically thought of as the cost of buying into the franchise system Think about how much you want to charge for what you are giving through the franchise. You will also want to consider a price that is accessible for your target franchisee If it is low, then consider the other fees and what you might charge to cover the costs of having the franchise.

6. Item 6 - Other fees. Are there other fees that the franchisee would pay throughout the term of the franchise agreement such as ongoing royalty fees, brand development funds, marketing, technology or training fees? Think about the actual costs that you incur by having the franchise For marketing, how much does it cost to market the entire brand? Will you ask the franchisee to spend a minimum amount on their own local marketing? These fees would go into a

9 These questions were adapted from a very helpful resource on franchises and on FDDs in general: https://www.franchiselawsolutions.com/learn/franchise-your-business/fdd. Page 57

table along with the amounts and due dates. It is possible to list the fees as a range and not give specific amounts

7. Item 7 - Estimated initial investment. This item requires giving a low to high estimate of the cost a franchisee would incur in establishing and opening the business. Are the build-out costs? Reserved capital for the first three months of operation? Security deposits? Costs to equip the business? These estimated costs go here in order to help the prospective franchisor understand the initial capital requirement for opening the franchised business.

8. Item 8 - Restrictions on sources of products and services. Will you require the franchisee cooperative to purchase specific products and supplies from either your cooperative or from a designated supplier? The main reason to consider doing so is to maintain consistency and quality control for the brand. However, you might decide that there are certain minimum criteria that the franchisee must consider when purchasing products and supplies but leave the specific types up to them. This item of the FDD requires listing any specific requirements around purchasing or leasing products and supplies If the cooperative or its officers own an interest in a required supplier, then you would have to disclose that information as well

9. Item 9 - Franchisee’s obligations. Here, you list what you are requiring the franchisee to do What systems and procedures must the franchisee regularly follow? Disclosing this information up front helps a prospective franchisee understand what its responsibilities will be before buying into the franchise This section will include items that might be listed elsewhere in the FDD with the intent of putting all of the obligations on the franchisee in one place. Obligations might include the following: site selection and acquisition/lease; pre-opening purchases and leases; site development and other pre-opening requirements; initial and ongoing training; opening; fees; compliance with standards and policies/manual; trademarks and proprietary information; restrictions on products and services offered; warranty and customer service requirements; territorial development and sales quotas; ongoing product and service purchases; maintenance, appearance and remodeling requirements; insurance; advertising; owner’s participation, management and staffing; records and reports; inspections and audits; transfer; renewal; post-termination obligations; non-competition covenants and dispute resolution.

10. Item 10 - Financing. Will you offer financing to the franchisee as to initial fees or other fees connected with the business? That information goes here

11. Item 11 - Assistance, Advertising, Computer Systems and Training. What type of assistance and training will you provide to the new cooperative before the business opens and while it is in operation? Will you assist in finding the business a location? In negotiating a purchase or lease? Complying with building codes? Obtaining relevant permits? Construction, remodeling or decoration of the Page 58

location? Obtaining equipment? Hiring and training employees or worker owners? Once the cooperative franchise is operating, will you provide assistance in training, product development, hiring, establishing prices,10 administrative support, bookkeeping, resolving operating issues, etc? What type of assistance will you provide for advertising? What type of media will you use? How much money must you spend (if any) on advertising the franchisee? When can franchisees use their own advertising materials? Will you require the franchisee to participate in an advertising fund? Are there certain computer systems or cash registers you will require the franchisee to purchase and use? In this item, you will also describe the typical length of time between signing the franchise agreement and the opening of the business. This section also provides the table of contents for the franchise operations manual The franchise operations manual is a how-to guide for the franchise. The operations manual itself is confidential, but in this section of the FDD, you must include the table of contents including how many pages are devoted to each section of the manual See Appendix C for a sample Table of Contents.

12. Item 12 - Territory - Here you note the franchisee’s territory and any restrictions on the territory. See the discussion in the previous appendix on territory.

13. Item 13 - Trademarks - Here you will disclose each trademark that you will license (remember that every franchise is a license!) to the franchisee–possibly your business name, logo, slogan, etc. You must also share whether the trademarks are registered or not, any litigation that might be pending regarding ownership or use of trademarks, and any limits on your rights to use or license the use of the trademarks

14. Item 14 - Patents, copyrights and proprietary information - Similar to the previous item, here you will disclose information about whether you own any rights or licenses to any copyrights or patents (including pending applications) that are material to the franchise.

15. Item 15 - Obligation to participate in the actual operation of the franchise business - Here, you let a franchisee know what the expectations are for the owners to participate personally in the direct operation of the business The intent of this item is to lay out, as clearly as possible, the amount of work necessary for the business to be successful so that prospective franchisees can determine if the time commitment and effort required fit with their lifestyle and goals It helps them fully understand what is expected of them before they invest in the franchise What is the amount of time you expect the franchisee to be directly involved in the operations of the business including any management duties? In

10 An important note on establishing prices: for the most part, you should make sure that the franchisee establishes its own prices for goods and services It might be possible to set minimum and maximum prices, but you should consult a franchise lawyer about this and make clear in your franchise agreement any powers you might give yourself as the franchisor to review or possibly alter franchisee’s pricing. Page 59

traditional franchise businesses, the franchisor would disclose whether it recommends on-premises supervision by the individual franchisee and/or any limitations or restrictions on hiring others to supervise the business including requiring a training program for on-premises supervisors In a worker cooperative, the management structure and participation of owners is different from that of a standard business Keep that in mind when you are describing the obligations of the owners to participate in the operations of the business.

16. Item 16 - Restrictions on what the franchisee may sell - Will you control what the franchisee cooperative may sell? Do you want uniformity throughout the franchise system? Or is it fine for franchisees to offer different products and/or services than your cooperative or others that become part of the franchise? Will you want the right to approve any products and/or services before they are sold? You must disclose to the prospective franchisee any restrictions

17. Item 17 - Renewal, termination, transfer and dispute resolution - Here you will list specific terms from the franchise agreement that relate to renewing, terminating and transferring the franchise relationship as well as the process for resolving disputes.

18. Item 18 - Public figures - Have you hired any celebrities or other public figures to help sell the franchise or have invested in it (not merely promoting the goods or services sold)? You would disclose that to prospective franchisees so that they know who is involved in the franchise system.

19. Item 19 - Financial performance representations - Disclose any representations you made to a franchisee or the public about the actual or potential financial performance of a franchised business. This would include any oral, written or visual presentation to a prospective franchisee or in the general media that gives a specific level or range of actual or potential sales, income, gross profits, or net profits You must disclose any responses that you have to questions such as the following: what do the cooperative’s numbers look like? What is the gross revenue for your cooperative? What do you take home? What are the projected revenues and earnings of the prospective cooperative franchise? What should we estimate our revenues to be in years one, two, three, etc? What profit margin should we expect? Do you have a pro forma worksheet to estimate revenues and profit?

20. Item 20 - Outlets and franchisee information - A prospective franchisee should understand the franchise system’s sales and franchisee track record. Here you will provide data and information about existing and future franchise outlets

21. Item 21 - Financial statements - You will provide three years of audited financial statements for your most recently completed three-year period. The statements must include income and cash flow statements and balance sheets You must have a certified public account prepare the statements along with an auditor’s consent letter and opinion letter If you are offering a franchise for the first time,

then you would only need to share your opening balance sheet. It would not need to be audited for federal purposes, but some states (including California, Illinois and New York) require that the opening balance sheet be audited by a certified public accountant

22. Item 22 - Contracts - This item requires listing and attaching all contracts that you are requiring a franchisee to sign with you such as a sample of your standard franchise agreement

23. Item 23 - Receipts - Finally, you must include a receipt page that the franchisee signs to confirm and prove that you have made proper disclosures and delivery of the FDD. A franchisor must provide a franchisee with the FDD at least 14 calendar days before the parties sign and the franchisor accepts payment related to the sale of the franchise.

AppendixC:OperationsManual-SampleTableof

Contents

The sample below is a simplified version of a Table of Contents, for a fictitious cleaning company.11 Each chapter has subsections, but for the purposes of this Guide, we wanted to give you an overview of what may be included in an Operations Manual for a franchise.

Table of Contents

CHAPTER 1: INTRODUCTION

CHAPTER 2: WELCOME TO THE CO-OP

CHAPTER 3: SUPPORT RESOURCES

CHAPTER 4: PRE-OPENING TIMETABLE & OBLIGATIONS

CHAPTER 5: FRANCHISEE TRAINING REQUIREMENTS

CHAPTER 6: STAFFING YOUR COMPANY

CHAPTER 7: OFFICE POLICIES

CHAPTER 8: OFFICE OPERATION AND MAINTENANCE

CHAPTER 9: OFFICE EQUIPMENT, COMPUTER SYSTEM, INVENTORY, AND SUPPLIES

CHAPTER 10: ADMINISTRATION

CHAPTER 11: REPORTS, AUDITS & INSPECTIONS

CHAPTER 12: VEHICLE ADMINISTRATION

CHAPTER 13: MARKETING

CHAPTER 14: SALES & PRICING

CHAPTER 15: INSURANCE REQUIREMENTS & RISK MANAGEMENT

CHAPTER 16: CORPORATE STRUCTURE AND FINANCING

CHAPTER 17: TRADEMARKS AND TRADE SECRETS

CHAPTER 18: FIELD OPERATIONS

CHAPTER 19: RESALE, TRANSFER, RENEWAL AND CLOSING

CHAPTER 20: EXPANSION AND RELOCATION REQUIREMENTS

11 For a more complete Table of Contents, see FranchisePrep, Operations Manual Template (2014). Page 62

franchisee

We recommend developing a rubric to assess whether a cooperator or group of cooperators are the right fit for your franchise Use the questions below as a starting point.12

1. What are your goals in becoming a franchisee? Gauge if their goals are compatible with yours.

2. Are you willing to adopt tools or models into your work? You want to know if the cooperators are willing to incorporate the systems you’ve developed into the business they will be running. There are some restrictions that come with being a franchisee, and you want to know early on if they see the value in what you have to offer.

3. Why our business/industry/sector? You want to know if they like the industry as much as you do!

4. Do you have experience in the industry? You will need to determine for yourselves if industry experience is necessary, but knowing how much experience cooperators have in advance, will help you recognize how much support you will need to provide

5. How does your team of cooperators feel about this opportunity? If there is more than one cooperator interested in becoming a franchisee, you should know how all of them feel about it, because all of them will need to be on board before moving forward.

6. How do you expect to build a customer base? While the franchisor provides marketing material and can help develop a marketing plan for the new franchisee, it is important to know how committed they would be to marketing the business

7. How will you finance becoming a franchisee? It’s typical for franchisors to require a level of cash reserves from potential franchisee partners, particularly to cover the costs of the first year. Consider what kind of financial requirements you will expect prospective cooperators to have met, to ensure they can operate their business in the first startup years

8. Do you expect to be profitable in your first year? As the franchisor, you need to know if your potential partners recognize the difficulty of the first year of operating the business. Work to set expectations with financial projections.

9. Why choose us? You can gauge how much they know about you and the brand, and gauge how excited they are about joining your franchise system

12 These questions were adapted from Eddy G. Franchising, The Interview: What the Franchisor Should Ask You.

10. Why do you think we are a good fit for you and your team of cooperators? You want to know if there’s a human connection that will make this a strong partnership.

11. When are you looking to open? Does their pace match your style and ability to meet their needs?

12. How many years are you considering committing to this project? It is always good to know how long cooperators are thinking about being part of a project While there is a term that both parties will agree to, it’s important to flag if they are compatible with your long-term goals.

8.Resources

● BrightlyⓇ , Interested in starting a Brightly cooperative in your area?

● Charles N. Internicola, Licensing vs. Franchising: Is There Really a Difference? (2019)

● Democracy at Work Institute, Worker Cooperative Development for Scale (2016).

● Eddy G. Franchising, The Interview: What the Franchisor Should Ask You.

● Federal Trade Commission, Franchise Rule Compliance Guide (2008)

● Franchise Law Solutions, What are the franchise laws?

● Franchise Law Solutions, What is the Franchise Disclosure Document?

● FranchisePrep, Operations Manual Template (2014).

● Gladys Glickman, 1 Franchising § 101 (Matthew Bender)

● Radiate ConsultingⓇ , Home

9.Acknowledgements

We are grateful to the Cooperative Development Foundation and New York Law School for funding the development of this Guide

We are incredibly grateful to the following cooperators who gave us their time to learn about their experiences developing and being members of expansion models for worker cooperatives in the United States:

1. María Carmen Tapia, founding worker owner of Brightly® Carroll Gardens

2. Natividad Aguilar, founding worker owner of Brightly® Washington Heights

3 Ian Peoples, worker owner of Radiate Consulting® North Carolina

4. Diana Perez, founding worker owner of Radiate Consulting® New York City

5 Vanessa Bransburg, Co-Executive Director of the Democracy at Work Institute

6. Juan Cuautle, Director of the Cooperative Development Program, Center for Family Life

7. Joseph Cureton, Chief Coordinating Officer, Obran Cooperative

8 Tim Huet, Development Support Cooperative worker owner, member of the Arizmendi Association of Cooperatives

We also want to thank our reviewers who gave us their time to read and give us feedback on this guide:

1. Minsun Ji, Drivers Cooperative

2 Melissa Hoover, The Democracy at Work Institute

Thank you to Marco Denaro and Natalie Klein for editing assistance

10. About the Authors

Maru Bautista

Maru Bautista is a cooperative development consultant with over a decade of experience supporting organizations and startups build and strengthen their cooperative ownership structures She specializes in curriculum, program and strategy development, and uses popular education in her workshops and facilitation. Prior to consulting, Maru worked in Sunset Park, Brooklyn as Director of the Cooperative Development Program at the Center for Family Life where she helped launch multiple cooperative businesses, including BrightlyⓇ , a worker cooperative franchise, and Up & Go, an online booking platform Her most recent work includes the Anti-Racist Facilitation Guide to Co-op Development. You can contact Maru at m@marubautistacom

Gowri Krishna

Gowri is a Professor of Law at New York Law School in New York City. She has provided legal representation to worker cooperatives since 2006 after graduating from Fordham University School of Law and starting her legal career in the Community Development Project at the Urban Justice Center (now known as TakeRoot Justice). Gowri has largely focused on worker cooperatives owned by immigrants and has partnered with the Center for Family (CFL), working with a number of cooperatives CFL has developed including the BrightlyⓇ franchise. She also worked with DAWI and the Radiate Consulting® network You can contact Gowri at gowri.krishna@nyls.edu.