Buying into a franchise can be a great way to start a business, as it offers a proven business model, brand recognition, and ongoing support from the franchisor. However, as with any business venture, there are potential legal issues that a prospective franchisee should be aware of before signing a franchise agreement. In this blog post, we will discuss some of the most common legal issues that can arise when buying into a franchise.
Franchise Disclosure Document (FDD)
One of the most important legal documents that a franchisee must review and understand is the Franchise Disclosure Document (FDD). The FDD is a legal document that the franchisor is required to provide to the prospective franchisee under the Federal Trade Commission’s (FTC) Franchise Rule. The FDD contains important information about the franchisor’s business, including its financial statements, litigation history, and fees associated with the franchise.
It is crucial that the prospective franchisee carefully reviews the FDD and understands its contents before signing any franchise agreement. The FDD can be a lengthy document, and the franchisor is required to provide the document at least 14 days before the prospective franchisee signs any agreement or pays any money to the franchisor. While there is a 14-day waiting period, you can still sign after that date. The prospective franchisee should also have the FDD reviewed by an attorney who is experienced in franchise law. In reality, taking the necessary precautions to review the FDD almost always results in a longer timeline, but can vary by franchise. It is essential that time and careful understanding is put into this fundamental stage in the franchise process.
Franchise Agreement
The franchise agreement is a legal contract between the franchisor and the franchisee. It outlines the terms of the relationship between the two parties, including the obligations and responsibilities of each party. The franchise agreement typically covers topics such as fees and royalties, territory restrictions, advertising requirements, and termination rights.
It is important for the prospective franchisee to carefully review the franchise agreement and understand the obligations and responsibilities that come with being a franchisee. The franchise agreement is a binding legal contract, and it is important to negotiate any terms that are not acceptable before signing the agreement.
Non-Compete Clauses
Many franchise agreements include non-compete clauses, which prohibit the franchisee from competing with the franchisor for a certain period of time after the franchise agreement ends. These clauses can limit the franchisee’s ability to operate in the same industry or geographic area as the franchisor.
Non-compete clauses can be a contentious issue in franchise agreements, as they can limit the franchisee’s ability to pursue other opportunities after the franchise agreement ends. It is important for the franchisee to carefully review the non-compete clause and negotiate any terms that are not acceptable.
Termination and Renewal
The franchise agreement will typically include provisions regarding termination and renewal of the agreement. These provisions can have a significant impact on the franchisee’s business.
For example, the franchisor may have the right to terminate the agreement if the franchisee fails to meet certain performance standards or violates the terms of the franchise agreement. On the other hand, the franchisee may have the right to renew the agreement for a certain period of time if certain conditions are met.
It is important for the prospective franchisee to carefully review the termination and renewal provisions of the franchise agreement and understand the consequences of these provisions.
Advertising Funds
Many franchise agreements require the franchisee to contribute to an advertising fund, which the franchisor uses to promote the franchise system as a whole. The franchisee may be required to contribute a certain percentage of its gross sales to the advertising fund.
The franchisee needs to understand how the advertising fund is used and what benefits it provides to the franchisee. The franchisor may have significant control over the advertising fund, and the franchisee may have little input into how the funds are spent.
Dispute Resolution
Franchise agreements often include provisions regarding dispute resolution, which outline the process for resolving disputes between the franchisor and the franchisee. These provisions can have requirements for mediation, arbitration, or litigation.
It is essential for the franchisee to understand the dispute resolution provisions of the franchise agreement and to negotiate any unacceptable terms. It is also vital for the franchisee to understand its legal rights and options in the event of a dispute with the franchisor.
Employee Issues
As a franchisee, the franchisee is responsible for hiring and managing its employees. However, the franchisor may have specific requirements and standards for the franchisee’s employees, including training and background checks.
It is essential for the franchisee to understand its obligations with respect to its employees and to comply with the franchisor’s requirements. Failure to comply with the franchisor’s standards for employees can result in legal issues for the franchisee.
State and Local Regulations
In addition to federal regulations, franchisees must also comply with state and local regulations. These regulations can vary significantly depending on the location of the franchise.
The franchisee needs to research and understand the state and local regulations that apply to its franchise. Failure to comply with these regulations can result in legal issues for the franchisee.
Conclusion
Buying into a franchise can be a great way to start a business. Still, the prospective franchisee must understand and address any potential legal issues before signing a franchise agreement. At Forward Law Firm, we have extensive experience in franchise law and can provide the guidance and support needed to address any potential legal issues and protect your investment. From reviewing and negotiating franchise agreements to resolving disputes with franchisors, our experienced attorneys are here to help you succeed as a franchisee. Contact us today to learn more about our services and how we can assist you in achieving your business goals.
