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Disclosures You Are Entitled to When Buying a Franchise

Disclosures You Are Entitled to When Buying a Franchise

If you are looking to buy a franchise from a franchiser, the franchiser must give you two crucial documents mandated by the Federal Trade Commission (the “FTC”): (1) a written disclosure statement (or “offering circular”) that sets forth certain information about the business to be franchised, and (2) a proposed franchise agreement or contract. A third attachment, an “earnings-claim” statement of the franchiser, may or may not be furnished, at the election of the franchiser. All of the above documentation, including the earnings-claim statement, is contained in a single form (as opposed to separate documents), commonly referred to as the “Uniform Franchise Offering Circular” (UFOC). (Most franchisers prefer the UFOC document since the document, with some modifications, is acceptable in all states.)

The disclosure is supposed to be written in plain English, clearly, concisely, and in narrative form. Even so, it sometimes requires a lawyer to interpret what is really being said — and what is not being said.

You are entitled to the disclosure material either at the first face-to-face meeting with the franchiser or 10 days in advance of the signing of the actual contract or paying money, whichever happens first.

The fact that the disclosure is government mandated does not mean that the offering has the approval or recommendation of the government, or that the information is complete or accurate, or the franchiser is reputable. The government does not check for truthfulness within the disclosure, how good a franchise is or the risk involved (this is despite a “risk factors” section in the document). Any confirmation, verification, and assessment of the contents are the responsibility of the buyer of the franchise. While misrepresentations, fraud, or omissions in the disclosure statement may result in civil and criminal liability to the franchiser, as a prospective franchise buyer you should be more interested in making sure you get what you bargain for, than having to sue someone down the road.

Which Terms of a Franchise Agreement May Be Negotiable?

Which Terms of a Franchise Agreement May Be Negotiable?

Many potential franchise buyers assume that a larger, well-known franchise company will have a “take it or leave it” mentality when it comes to negotiating the terms of the franchise agreement. While this may be true in some circumstances, there are some terms that may always be negotiable, depending on the size and longevity of the franchise business. Before signing the franchise agreement and making a long-term commitment to the franchise business, the buyer should make every attempt to negotiate favorable terms.
Negotiating the Terms of a Franchise Agreement

A large franchise company like McDonald’s may not be willing to negotiate details such as the type of food franchise buyers will serve, or the type of uniforms franchise employees will wear. Part of selling a franchise, especially a long-standing franchise, means selling a set of successful business processes, including equipment, prices, and customer service strategies. When you buy a franchise, you should be prepared to buy into the same rules, fees, and business methods adhered to by every other franchisee in that business.

However, depending on the franchise business in question, you may be able to negotiate on some issues. Upfront fees for a franchise business can fall between ten and sixty thousand dollars. You may be able to negotiate the upfront fee through financing methods or an overall price deduction. This may be easier during a difficult economy in which franchise business sales may have slowed. You may also be able to negotiate the royalty fee. While the franchise company may be unwilling to lower the percentage of the royalty fee, you may be able to have the fee deferred through an initial start-up period. You may also be able to negotiate the size or area of your franchise territory. Most franchise agreement terms will promise that no other company franchises will fall within a specific distance of your restaurant or store. Other negotiable issues can include the size of the road sign, or the number of people you can send to franchise company training sessions.

A Franchise Business Attorney Can Help

If you review the proposed legal contract with a lawyer, you will learn what provisions which appear to be “boiler-plate” can be changed, if it is important to you, and not significant to the franchiser. A franchise attorney can also help you anticipate problems that may arise (e.g., location, equipment, pricing, competition, new products) during the life of a contract, and perhaps solve some now, saving you time, money and headache later. Agreed modifications should be in written, not oral, form.

What is in a Franchise Agreement Document?

What is in a Franchise Agreement Document?

The franchise agreement is the cornerstone document of the franchisee-franchisor relationship. This document is legally binding on both parties and lays out the rights and obligations of each. A sample agreement may either be attached to the disclosure statement or presented separately. Either way, you are entitled to receive it as a prospective franchisee five business days before signature. You should have it reviewed by a lawyer familiar with franchise matters, especially since most agreements are extremely one-sided in favor of the franchisor. No one should enter into a franchise agreement and expect to have an evenly drawn contract.

The agreement will contain provisions covering, in considerable detail, the obligations of the franchisor (the company) and franchisee (you) regarding operating the business; the training and operational support the franchisor will provide (and at what cost); your territory and any exclusivity; the initial duration of the franchise and any renewal rights; how much you must invest; how you must deal with things such as trademarks, patents and signs; what royalties and service fees you will pay; tax issues; what happens if you should want to sell or transfer the franchise; advertising policies; franchisee termination issues; settlement of disputes; and cancelling of the franchise by the franchisor.

There is no standard form of a franchise agreement because the terms, conditions, and the methods of operations of various franchises vary widely depending on the type of business involved. For example, franchises for printing, employment agencies, and automotive products will differ from the franchises for fast food service, convenience stores, or clothing.

Termination and Nonrenewal of Your Franchise Agreement

Termination and Nonrenewal of Your Franchise Agreement

Termination or non-renewal of a franchise agreement will depend on what the franchise agreement you signed says, whether or not you have complied with it, and whether or not the franchisor did all that it had promised to do in the agreement.

At the outset, franchisors generally have the right to choose the parties they wish to do business with and may use their own judgment in entering into a new franchise relationship. After the period covered in the franchise agreement, and subject to your rights to renew, you will need to negotiate with the franchisor over extending the franchise.

If you have failed to comply with the agreement, you can expect that the franchisor will not be enthusiastic about continuing its relationship with you. In fact, even before the original term is over, the franchisor may seek to terminate your franchise if you do not comply with the franchise agreement.

Depending upon the appropriate state law, a franchisor may have the right to terminate a franchise or to refuse to renew a franchise for “good cause” – such as failure to meet sales quotas or lack of quality standards. Many contracts are drafted in such a manner that it is probable that a franchisee would breach it at some point, allowing the franchisor to cancel the contract or not renew it. Some state statutes require specific conditions, such as failure to meet monetary obligations, correct defects, or quality standards, for termination or for non-renewal. Other states also require special notices within certain time periods be provided to the franchisee before termination or non-renewal.

Negotiating Your Franchise Agreement

Negotiating Your Franchise Agreement

While a franchise company may make you feel that the business agreement is non-negotiable, this is not always the case. The agreement you sign with the franchise company will dictate all of the terms of your business relationship for as long as you own the franchise. As a result, you should make sure you’re satisfied with the agreement. While there are some terms in the franchise agreement that are determined by state law, many other terms may be negotiable, depending on the franchise business in question.

Negotiating a Franchise Agreement

When you buy into a franchise business, you are buying into an already proven, successful business model. That being said, some of the terms of the franchise agreement will not be negotiable because they relate to the trademark of the business or specific business processes. If the success of the franchise business is linked to the checkered tiles on the floor, then you are probably stuck with these tiles in the terms of your contract.

Other terms that do not relate to the business model may be easier to negotiate. The upfront fees or royalty payments, for example, may be negotiable. Generally, you will pay thousands of dollars as an initial investment into the franchise business and you will need to continue making royalty payments on your gross revenue. However, depending on the area and the state of the economy, the owners of the franchise company may accommodate you, especially if they think they might lose your business if they don’t. Much depends on the relative bargaining posiiton of the franchiser and you as a prospective franchisee, and how astute your lawyer is.

Flexible Terms in a Franchise Agreement

Some terms that may be negotiable include the exclusivity of your franchise territory, the timing of payments, price, and the duration of the franchise business. There are certain terms that you may want to add to the franchise agreement as well. For example, you may want to clarify your rights in the event of a merger or acquisition. While the franchise company may tell you that they have no intention of going out of business or merging with another franchise company, remember that the contract you sign will be valid for five years or more and many things may change during that time.

To help you navigate your franchise agreement with a franchise business, it is advisable to have a business attorney by your side who predominately represents franchisees. A knowledgeable attorney will be able to review the franchise agreement, make suggestions for negotiations, and point out terms that are missing. Buying into a franchise company can be a serious investment so you will want to understand every detail before you sign a franchise agreement.

What Happens to a Franchisee if the Franchise Business Fails or Changes Ownership?

What Happens to a Franchisee if the Franchise Business Fails or Changes Ownership?

When one franchise business merges with another, the franchisee’s business rights are almost always affected. It doesn’t seem fair that a franchise owner who may have once been a competitor, perhaps running another business in the same area as yours, will now be sharing a brand name with you. This kind of change can have an obvious impact on a franchisee’s business operation. Unfortunately, the franchisee doesn’t have many legal protections in this area unless such protections are included in the initial franchise agreement. The franchisor simply has more rights to the franchise than the franchisee does. The franchisee will generally not be able to put in a veto vote to keep the merger or acquisition from happening, as this option is not usually part of the contract between the franchisee and the franchisor.

Know Your Rights as a Franchisee

The most important thing a franchisee can do is to know his or her rights before signing the franchise contract. Your contract should explicitly state what will happen in the event of a merger with, or acquisition of, another franchise. While some franchisors are willing to negotiate these types of agreements, others are not. An example of this type of franchise contract is an agreement to give the franchisee the first opportunity to purchase any franchise operation in its territory after a merger with another franchise business.

As an alternative to buying the franchise operation, the franchise contract may also include an agreement to shut down any competing unit within the franchisee’s specific territory. As a buyer, you may also be able to negotiate a contract that says that you will have the option to terminate your franchise agreement and be refunded a portion of your initial franchise fee in the event of a merger or acquisition.

There are other various types of arrangements you may be able to negotiate with the franchisor. Examples of other possible contracts include: an agreement to operate the two different trademarks in the same fashion after the merger; an agreement by the franchisor to repurchase your franchise for fair market value at the time the merger takes place; or an agreement to reduce your royalty fee to make up for any business lost due to new competition.

When a Franchise Business Goes Bankrupt

If the franchise business collapses or goes bankrupt, there are unfortunately not many options for the franchisee. The creditors will have rights to all of the franchisor’s assets, which include the brand or trademark rights. Since courts will have the discretion to determine the rights of creditors, the franchisee is subject to the court’s order, and may very well be out of luck.

In order to protect your rights as a franchisee, you must understand the details of your franchise agreement. Frankly, if there is a change in franchisor ownership or the franchisor collapses, you will need a lawyer.

What Do Most Franchise Businesses Have in Common?

What Do Most Franchise Businesses Have in Common?

There are many commonalities between one franchise business and another. One basic commonality is the method by which the franchise owners and buyers do business. The owner of the franchise business, or the franchisor, sells the trademark rights to the franchisee, who opens up a replica of the owner’s company. The business is based upon a common method or approach that relies on a combination of techniques or products plus the frranchiser’s special trademark, service mark, trade name, logotype, advertising, or other symbol that designates the franchiser.

Franchise Business Commonalities

Another commonality between all franchises is the Franchise Disclosure Document. The Federal Trade Commission (FTC) requires that the owner of a franchise business provide a disclosure document to a franchisee at least 14 days before finalizing the deal or signing the contract. As required by the FTC, each Franchise Disclosure Document will include the same basic categories of information.

These categories include license and permit requirements, the business backgrounds of the owner or management team, a list of other current or former franchises, any bankruptcy or litigation history the franchise has been subject to, all franchise fees, and all trademark or copyright information. The franchisor will most likely require the franchisee to buy certain types of insurance for the franchise as well, which also must be listed in the Franchise Disclosure Document.

Commonalities Related to Fees

The specific franchise fees and royalties listed in the Financial Disclosure Document will also have some commonalities. In all franchise sales, the franchisee will have to make several types of payments, some upfront and some ongoing. In virtually every franchise business deal, the franchisee will have to pay the franchisor for the right to use the franchisor’s trademark, as well as the cost of training and other expenses. These expenses may be included in a one-time, upfront payment. The franchisor will also collect ongoing royalties from the franchisee as part of the business deal.

While franchises share a similar business structure and basic paperwork, there are also many differences between individual franchise business models. For more information, or for guidance on investing in a franchise business, contact an experienced franchise attorney.

Do Franchise Laws Vary by State?

Do Franchise Laws Vary by State?

While every franchise business is subject to the franchise regulations laid out by the Federal Trade Commission (FTC), franchises are also subject to state franchise laws and regulations as well. While the FTC franchise regulations are aimed at all types of franchises, many state regulations are industry-specific. Further, franchise law is not a completely separate body of law, since it also involves other state laws such as trademark, intellectual property, and commercial. This means that there can be many different nuances between franchise laws from state to state.

Some states have comprehensive franchise regulations. The franchise laws in these states usually require the franchiser to register with the state government. While the FTC regulations state that a Franchise Disclosure Document must be given to the franchisee, many states with comprehensive franchise laws will have further rules on what is to be provided to a potential franchisee. Various states may also require the franchisor to file the necessary documents with the state. States with comprehensive franchise laws will also generally review the franchisor’s financial information as well as any documents they plan to give to a potential franchisee.

Do Some States Have More Stringent Franchise Laws?

The intention of high-regulation states is to reduce fraudulent business practices. A state can deny the registration of a franchise business if it feels that franchise documents contain false or misleading information. These states may also deny registration if there are circumstances in which selling the franchise would be deceptive in some manner. The FTC website has information about which states have these comprehensive franchise laws.

There are other various franchise laws that apply in certain states. Many states have laws that regulate the relationship between the franchisor and the franchisee called franchise relationship laws. These relationship laws mainly require the franchisor to have “good cause” before it can refuse to renew a franchise contract with the franchisee. This adds an extra layer of protection for the franchisee, who may want to extend the franchise contract. Sometimes these relationship laws will determine what happens in the event of the death of the franchisee, and any devising rights the franchisee has to his or her heirs.

Some states also have franchise laws that apply to specific industries, such as auto dealers or service stations. Furthermore, the legal definition of a franchise can vary from state to state.

Can the Franchisor Be Taken to Court in the Franchisee’s Home State?

This will depend on the state law and, if consistent with state law, the franchise agreement. Many franchise agreements provide that all disputes must be settled out of court in arbitration, forbidding any lawsuits, unless the state does not permit that type of dispute resolution structure within the agreement.

If lawsuits are possible, be aware that most franchisors want to have lawsuits heard in their home state, and structure their franchise agreements accordingly. However, several states have laws which require that franchisors be amenable to suit in the state in which the franchise is located.

Should You Consult a Franchise Lawyer?

Yes. Because franchises are subject to a multi-layered variety of complex federal and state laws and regulations, it is important to deal with an attorney familiar with franchising generally and your state’s laws in particular.

Can a Buyer of a Franchise Select the Business Location?

Can a Buyer of a Franchise Select the Business Location?

The buyer of a franchise (franchisee) has some say when determining the location of her franchise. The amount of input a buyer may be able to give when determining the location of their franchise will also depend on the experience of the franchisor. However, a good franchisor, even a less experienced one, should have its own tools to assist the buyer in making her location decision. On the other hand, because the franchisor knows its brand the best, a franchisee should be open to receiving the franchisor’s input when determining where to open the franchise.

Initial Franchise Location

The location of your franchise and your franchise territory is generally defined in the franchise agreement, but be aware the franchiser generally has the “bigger say” and can limit the territory and the location of the franchising business so long as it has a business reason to justify the restricted area. It is therefore important to have a franchise attorney scrutinize the franchise agreement to ensure that you are getting the terms that you negotiated. Generally, after the franchisee decides on a franchise to invest in, he or she will start thinking about where to best place her store. Many franchisors expect you to have a general area in mind when you make the decision to open one of their franchises. However, if you come to an initial meeting with a specific location in mind, be prepared to rethink your initial location strategy.

Most franchisors will have a specific set of criteria developed to assist you in choosing a location that will help to ensure the success of the new franchise. This will include the amount of parking, the amount of foot traffic, and who the neighbors are in the immediate area. For example, if you want to open a sandwich franchise, is your store in a location that attracts a lot of people out for lunch? Parking is equally important. Are drivers able to take a left turn into your parking lot? Your immediate neighbors are also an important thing to think about when determining a store location. What are the other businesses surrounding your location?

Positioning Your Franchise and Understanding Your Franchise Territory

A major retailer, such as a Walmart or Macy’s, may be an ideal neighbor to have, as these stores will bring a lot of foot traffic to the surrounding location. Further, it is also important to think about who is right next door. For example, if you want to open up a toy store, you probably won’t want to open it next to a gun shop. If you want to open a bakery, it may be best to open it next to a lunch place so people will visit you for dessert.

While some franchisors may already have specific locations in mind for their next store, most franchisors will generally give the franchisee their guidelines and then leave it up to the franchisee to find a place that falls within those guidelines. Be aware, however, that the franchisor may limit your franchise territory to only a few blocks. Your franchise territory is the territory in which the franchisor guarantees that another of the same franchise will not open. Further, your franchise territory may be hard to negotiate. This is especially true if the franchisor has a well-known or well-developed franchise.

Signing the Franchise Lease

Once the franchisee and franchisor have settled on a location that meets the needs of the franchise, you will sign a lease for your business with the building owners. A good franchisor will help you through this process, and may be able to negotiate certain provisions in the lease. For example, if you want to move your franchise into a mall that has a Walmart as its “anchor” business, you may be able to include a provision in the lease that allows you to renegotiate the terms of the lease if the Walmart moves out of the mall. A franchisor can also help you negotiate the rent, the percentage that the rent will rise each year, and determine what kind of business insurance the building owner requires you to have. A building owner will generally be more willing to negotiate terms with a franchise owner more than any other business because franchises have a higher rate of success than many mom-and-pop businesses.

The Ideal Franchise Location

At the end of the day, an ideal franchise location has plenty of available parking, a lot of foot traffic, and at least one or two anchor businesses to ensure that the foot traffic is maintained. Most importantly, however, is that you stay within your budget and within the economic means of your business. Remember that when you are seeking out the right location, you are planning for your future. This means that all aspects of the location must be taken into consideration, especially the price.

Getting Help

To help ensure that you are signing into a smart lease and a good franchise plan, you should consult with an attorney who primarily represents franchisees.

How To Franchise a Great Business Idea

How To Franchise a Great Business Idea

Deciding to create a franchise is a great way to expand your business because it is an opportunity to get your idea out there without having to assume the risks and come up with the capital on your own. When you franchise a business, the franchisee pays the franchisor a fee up front. This fee generally covers the right to operate a business under the franchise trademark.

The franchisee then invests the capital, hires the employees, and signs the leases. This relieves the franchisor of most of the risk and burden that comes along with starting a business.

However, franchising a business is not the right method of expansion for everyone. You must first determine if your business is “franchisable.” Doing your homework first will save you a lot of time, effort, advertising, and legal fees when another expansion option may have been the better choice.

Things to Consider Before Franchising Your Business

An owner who wants to franchise should have a passion for management and a strong ambition to grow their business. If you are the type of owner that likes to play a more behind-the-scenes role, franchising your business may not be the right decision for you. Once you have decided that you are, you should subject your concept to a careful feasibility study to see if the business you have makes sense as a franchise concept.

Other considerations come into play: is there a large market for my business? Many great business ideas are not suited for a large market. You should determine if your idea is, or could be, a commonly desirable good or service. Furthermore, determine if there is something about your business that is unique so that potential customers are attracted to your product.
Moving Forward with Your Franchise

If you believe that your business idea is both unique and marketable to a large market, you should then determine how difficult it will be to train a franchisee to operate a successful duplicate of your business. If there is a lot of specialized knowledge involved or if your business has had the majority of its success because of relationships that you have built over the years, training could be difficult.

Once you have determined that your business is marketable, and that a franchisee will be able to learn how to run your business fairly easily, you should put yourself in the shoes of a potential franchisee. Will a potential investor see the advantages of investing in your business? Is it a business that can make a profit so your annual royalty fee can be paid? While you may have a marketable business, that does not necessarily mean that you will have a marketable franchise.

Making Your Franchise Marketable

To make your franchise marketable, your business should be profitably operating and have a strong team of employees. These elements are crucial because someone will not want to invest in an untested concept. A potential franchisee should be able to see the value of your business. They should be able to see a business in which will be worth investing their time and capital.
Getting Help with Your Franchise

Once you are convinced franchising does make sense, you should contact a franchise law attorney. A franchise law attorney can help you with the intellectual property protections you’ll need for your franchise. These protections include trademarks, patents, and trade secrets. A franchise law attorney will also help you make sure you comply with Federal Trade Commission (FTC) laws and the franchising laws of the key states in which the franchise would be offered or before you start to sell the franchises.