Steps to Secure Your Franchise Legally

What Every New Franchisee Needs To Know

Starting a franchise can be an appealing path to business ownership. However, every prospective franchisee should understand the complex legal issues around franchising before signing any agreement or handing over any money. This article explains key aspects of United States franchise law and contracts in plain language so you can make informed decisions about your franchise investment. We’ll cover:

• An overview of federal and state franchise regulations  

• Legal obligations for franchisors and franchisees

• Protections provided — and not delivered — by franchise agreements   

• Steps to take before committing legally or financially

• Where to turn for guidance during your franchise relationship

• Frequently asked legal questions

Holon Law Partners has 100+ years of combined experience guiding clients through complex cases and legal intricacies. Our approach is empathetic, customized, and client-centered with a focus on you and your unique business needs. To schedule a consultation with us, call our team at  (866) 372-0726 or email us at: info@holonlaw.com. 

Franchise Law Basics    

The franchisor-franchisee arrangement is heavily regulated under federal and state laws to help protect franchisees from exploitation while keeping franchisors accountable for properly supporting their network.

The Federal Trade Commission (FTC) Franchise Rule defines a franchise formally and outlines mandatory disclosures franchisors must provide in their Franchise Disclosure Document (FDD) before signing agreements or accepting payment. Individual states also regulate franchising within their borders through “franchise relationship laws” that expand on rights, termination procedures, and relationship conduct.

Under this combined federal and state oversight, there are legally binding standards both parties must continually meet, with remedies in place when violations occur. So, while franchising seems less “risky” than independent startups, it does not remove legal liabilities and due diligence requirements for franchisees.  

Key Franchise Agreement Terms To Understand

The franchise agreement is the binding contract between the franchisor and the franchisee throughout their relationship. Before entering into one, it is highly recommended that you engage a franchise lawyer to review the agreement. An experienced franchise attorney can explain the implications of specific terms, potentially negotiate more favorable provisions, and ensure you understand commitments before signing.

Here are some of the most important sections to parse carefully:

• Length of Term + Renewal Option: Franchise terms generally range from 5-20 years. Understand the conditions and process for renewing when your term expires.   

• Exclusivity Clause: This defines whether you have exclusive rights to operate locations within a specific territory without direct competition from other franchisees.

• Required Purchases and Approved Vendors: Franchisors may mandate buying from approved suppliers even if third-party costs are lower. Make sure you understand and are comfortable with any such requirements.

• Marketing Obligations and Restrictions: Agreements detail required local advertising contributions and restrictions on promotional activities to protect branding. Marketing through specific channels or partnerships may be prohibited.

• Causes for Termination:  Understand precisely what conditions could cause your franchise rights to be terminated by the franchisor.

• Transfer/Assignment Terms: If you ever wish to sell your franchise location, see what limitations may apply around approving a new franchisee.

These are just a few examples of provisions corporate business lawyers carefully evaluate and negotiate before final agreements are signed. Do not skip this step, or you may regret it later!

Frequently Asked Legal Questions:

1. What Business Entity Should I Form To Own The Franchise?

Consult counsel to form the appropriate type for tax purposes, liability protection, and regulatory requirements based on your franchise operating model. Limited liability companies (LLCs) are common.

2. Can I Renew My Franchise Agreement When The Term Ends?

Understand the specific conditions and process for renewal outlined in your agreement. Negotiating this upfront is recommended so you retain flexibility.

3. Am I Protected If The Franchisor Goes Out Of Business? 

Unfortunately, no. The FTC Rule does not require franchisors to escrow funds for refunds. Thorough vetting before signing is the best protection.

4. Can My Franchise Agreement Be Terminated by the Franchisor?  

Yes, if you violate terms around payments, brand standards, operations, etc. Understand the causes for franchise termination outlined and avoid breaches.

5. What If I Have Disputes With My Franchisor?

Franchise relationship laws define resolution procedures to try first before litigation, which may include mediation or arbitration.  

Choosing a Business Lawyer for Your Franchise 

Whether starting your franchise journey or facing challenges later on, understanding the legal landscape is critical for making intelligent decisions and protecting your interests over the long term. Reach out with any additional questions!

Holon Law Partners has 100+ years of combined experience guiding clients through complex cases and legal intricacies. Our approach is empathetic, customized, and client-centered with a focus on you and your unique business needs. To schedule a consultation with us, call our team at  (866) 372-0726 or email us at: info@holonlaw.com.