Franchise Law FAQs

What disclosure documents is a franchisor required to provide to a prospective franchisee considering the purchase of a franchise?

A franchisee planning to purchase a franchise is entitled to obtain the franchisor’s current Franchise Disclosure Document which contains:

  1. Written disclosures setting forth the required information concerning the business to be franchised.
  2. Copies of all agreements the franchisee must execute as a condition to entering the franchise system.
  3. The franchisor’s prior three years of audited financial statements and other exhibits necessary to comply with the Franchise Rule and applicable state franchise laws.

The franchisee is entitled to receive the disclosure documents at least 14 calendar days before any contract is executed or money changes hands. The day of receipt is not permitted to be counted as one of the 14 days.

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What is a franchise agreement?

A franchise agreement is the most important document of the franchisee-franchisor relationship. This document legally binds both parties, laying out the rights and obligations of each.

Franchise agreements detail:

  • The duties of the franchisor and franchisee with regard to the franchised business
  • The training and operational support the franchiser will provide – and at what cost
  • Territory restrictions or exclusivity arrangements
  • The franchisee fees
  • Intellectual property management matters
  • Tax issues
  • Franchise sale or transfer restrictions
  • Advertising and branding policies
  • Franchisee termination issues
  • Dispute settlement procedures
  • Operating practices
  • Cancellation provisions
  • Attorney fees.

A sample franchise agreement must be attached to the franchise disclosure document. If the FRANCHISOR makes unilateral, material changes to the sample franchise agreement, a prospective franchisee is then entitled to review the changed agreement for at least seven calendar days before being permitted to sign it.

Most franchise agreements favor the franchise seller, so the prospective franchisee should have franchise counsel review the documentation before execution. There is no standard form franchise agreement, as the terms, conditions, and the scheme of operations of various franchises differ based upon the type of business involved.

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Does a franchise agreement have to be in complicated legalese?

While there are several issues that need to be included, there are no legal reasons for franchise agreements to be complex. However, many franchise lawyers still use complicated sentence structures in legal documents.

By contrast, franchise disclosure documents must use simple plain English. If potential franchisees are having trouble understanding a franchise agreement, consider having it re-written.

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What is co-branding?

Change first sentence to read: “Co-branding occurs where two or more franchise systems work together. Two companies might act in cooperation by having two differently branded franchises in the same location. They would share operations and equipment while often retaining their respective logo signage and color schemes. Such co-branding franchise agreements are more complicated than average franchise agreements.

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What factors should a franchisee consider before choosing a franchise?

A potential franchisee should consider a number of factors when choosing a franchise because buying and operating a franchise involves a large investment and considerable risk. A few of the many factors to consider include:

Demand:

  • The franchisee should consider whether there is a demand for the franchisor’s products or services in the target market area; whether the demand is seasonal; and, whether the product or service will generate repeat business.

Competition:

  • The franchisee should consider what competition the franchised business will face; how many franchised and company-owned outlets the franchisor has in same area; how many competing companies sell the same or similar products or services; and, whether the competing companies offer the same goods and services at the same or lower price.

Franchisee’s Ability to Operate the Business:

  • The franchisee should consider whether he or she would be able to operate the franchised business even if the franchisor goes out of business; whether the franchisee will need the franchisor’s ongoing training, advertising, or other assistance to succeed; and, whether the franchisee will have continuing access to the same or similar suppliers.

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How can a franchisee investigate complaints against a franchisor?

A franchisee can obtain information about consumer complaints against a franchisor by consulting the Better Business Bureau or by making a request in writing to the Federal Trade Commission in Washington, D.C. under the Freedom of Information Act. The request should be made for complaints received nationwide, as franchisors may have changed the name and/or locations of their franchises in order to avoid the build up of complaints in a single geographic area.

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What is the best/hottest/most popular franchise or business opportunity to buy?

You should choose a business in which you enjoy being involved, and not merely because it promises to make you a lot of money or that you like its “sizzle”. The choice of a business may be based upon many combinations of factors such as an individual’s personality, life experiences, business background, and personal goals.

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I’ve operated the business for a while, and want to acquire another unit. Do I need a lawyer to go about doing that ?

No, most franchisors will be happy to sell you another unit if certain conditions are met. However, it is recommended that you have a lawyer review the documents and advise you of any contract changes from those signed for the original unit, as well as any new obligations or waviers which were not a consideration in the original contract package.

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I’m not happy with my business, it isn’t living up to what I expected of it. Is there anything I can do after I’ve signed the franchise agreement?

Once a buyer of the franchised business begins to operate that business, he or she may realize that it does not live up to the promises made when the franchise sale was being solicited. It is natural to begin to question whether the buyer had been dealt with fairly. There may be significant legal remedies separate from the franchise documents if a buyer has been dealt with in a manner which fails to comply with the various state or federal laws which apply in franchise sales transactions. A franchise buyer should learn and understand its legal rights by consulting with an attorney familiar with franchising law prior to undertaking any decision to solve its particular franchise purchase problem.

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When should I contact a franchise lawyer?

People often delay in contacting a lawyer, perhaps not wishing to accept the current circumstances in which they find themselves. Or, they hope those circumstances will change over time for the better. What they may not realize is that many franchise agreements now contain language seeking to shorten the time in which the franchisee may bring a claim against its franchisor. In addition, the various states have differing statutes of limitation – laws which set strict deadlines by which claims must be brought against another party or those claims are forever barred. Attempting to “straighten things out” by yourself directly with the franchisor without first knowing your rights and liabilities under your particular circumstances could actually make things worse. For all of these reasons, one should contact a knowledgeable franchise attorney as soon as she suspects something might be wrong!

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Contact Stephen Feidelman

Whether you are contemplating entering into a franchise agreement or are involved in a franchising dispute, Stephen Feidelman offers you a full array of franchise-related legal services.

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