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March 22, 2024 | BusinessGeneral

5 Things to Consider Before Becoming a Franchisee

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Author(s)
Robert Kleinfeldt

Senior Counsel

A franchise is a business model in which one party (the franchisor) grants another party (the franchisee) the right to operate a business using the franchisor’s brand, trademarks, and business model.  This arrangement typically involves a franchisor providing a franchisee with services, such as administrative support, ongoing guidance and training, as well as furnishing goods, products, and marketing materials, in exchange for certain fees, which typically include an initial franchise fee as well as ongoing royalties.  Franchises are ubiquitous but are most recognizable in industries such as fast food, retail, and hospitality.

Becoming a franchise owner (known colloquially as “franchising”) is an exciting endeavor, but it is essential to approach the process with a clear understanding of the legal intricacies involved.  Franchising presents some unique legal considerations that are distinct from the traditional process of starting a business from scratch.  Before committing to a franchise opportunity, it’s crucial to carefully assess various legal considerations, including the following:

  1. Franchise Disclosure Document (FDD) Review:

The Federal Trade Commission (FTC) mandates that franchisors provide prospective franchisees with a Franchise Disclosure Document (FDD) containing detailed information about the franchise system.  The FDD is a comprehensive document that provides essential information about the franchise opportunity.  It typically includes details about the franchisor’s background, such as its history, executive team, and financial standing.  Additionally, the FDD outlines the initial investment required, and addresses items like franchise fees, real estate costs, and equipment expenses.  Ongoing expenses, such as royalties, marketing fees, and inventory purchases, are also typically disclosed.  The FDD may describe the training and support programs offered by the franchisor to assist franchisees.   As a prospective franchisee, it is important to thoroughly review the FDD with legal counsel to understand the terms and conditions of the franchise agreement, with an emphasis on any restrictions, fees, and termination clauses.

  1. Franchise Agreement Negotiation:

Franchise agreements are legally binding contracts that establish the terms of the relationship between the franchisor and franchisee.  These agreements typically cover a wide range of topics, including the franchisee’s rights and obligations, as well as the franchisor’s responsibilities.  Key components of franchise agreements include details regarding the franchise territory, the duration of the franchise term, as well as the initial franchise fees and ongoing royalty payments.

Operational guidelines are another critical aspect of franchise agreements. These guidelines detail the standards and procedures for running the franchise.  These standards and procedures generally outline specific marketing requirements, product and service offerings, and quality control measures.  Understanding the obligations within the franchise agreement is essential to understanding the operation of your business and ensuring its success.

In some cases, certain provisions contained within the franchise agreement may be negotiable.  Working with an attorney well-versed in franchise law can ensure that you negotiate a franchise agreement that is favorable to you.  Franchise agreements serve as the foundation for the franchise relationship, establishing the rights, responsibilities, and expectations of both parties involved.

  1. Compliance with Employment Laws and Regulations:

Although a franchisee may be operating in the business system of the franchisor, it is typically the responsibility of the franchisee to ensure compliance  with all applicable laws, including employment laws   (that must adhere to federal, state, and local employment regulations),  minimum wage laws, overtime pay requirements, anti-discrimination statutes, and workplace safety standards.

Franchisees must also ensure compliance with various equitable hiring practices in addition to conducting background checks and verifying work eligibility for employees.  Additionally, they are responsible for providing a safe and fair working environment, implementing policies to prevent harassment and discrimination, and providing reasonable accommodations for employees with disabilities.  Franchisees must also maintain accurate records of employee hours, wages, and employment terms.  Any failure to uphold these legal obligations can yield punitive consequences, including fines, penalties, and potential lawsuits. Therefore, franchisees must stay informed about evolving regulations and seek legal guidance when necessary to mitigate risks and protect both their employees and the integrity of the franchise operation.

  1. Intellectual Property Rights and Brand Protection:

Franchise agreements typically grant franchisees the right to use the franchisor’s trademarks, trade names, and proprietary business systems.  It is imperative that any franchisor both understands and protects the intellectual property rights of the franchisee.  It is always advisable to ensure that any franchise agreement outlines the scope of the franchisee’s rights to use the franchisor’s intellectual property, including provisions for trademark registration, infringement protection, and enforcement mechanisms.

  1. Dispute Resolution and Exit Strategies:

Despite efforts to mitigate potential conflicts, disputes may arise between franchisees and franchisors during the franchise relationship. The franchise agreement should include clear provisions for the resolution of any disputes, such as mediation, arbitration, and/or litigation procedures.  Additionally, clear termination, or exit strategies, should be negotiated in case the franchise relationship becomes untenable or you wish to sell your franchise unit.  Understanding your rights and obligations regarding termination, assignment, and resale of the franchise is a critical component for protecting your investment.

Conclusion

Navigating the legal landscape of franchising requires careful consideration and expert guidance. Before becoming a franchisee, consult with experienced franchise law attorneys to assess the legal implications of the franchise opportunity to ensure that your rights are both understood and safeguarded throughout the franchise relationship. With proper legal diligence and strategic planning, you can embark on your journey as a franchise owner with both confidence and peace of mind.

 

Photo by Heidi Kaden on Unsplash
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