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To franchise or not to franchis a question needing legal guidance

On Behalf of | Jan 24, 2024 | Firm News

Franchising can be a sound option for either franchisors or franchisees.

What is a franchise? Legal sources say that a precise definition is difficult, but in the U.S., we usually think of franchises as the business concerns on parade on every suburban strip: the familiar, repeating fast-food restaurants, hotels, service providers, retail stores and more.

Nature of a franchise relationship

Broadly, a franchise is a business arrangement between the owner of a trademark, brand, product or service (the franchisor) that enters into a franchise agreement giving the other party (the franchisee) the right to use or sell the franchisor’s trademark, brand, product or service for business purposes.

Complex legal requirements

Entering into a franchise agreement is a complex legal proposition that is controlled both by federal law (largely antitrust regulations of the Federal Trade Commission) and by state law. Franchise requirements vary greatly among the states so both franchisors and franchisees should retain experienced business lawyers with knowledge of franchise law in the states under consideration.

In addition to specific legal requirements for franchising itself, each state may have franchise registration, notice or filing requirements; or state fees, one time or ongoing.

Franchise agreements

The franchise agreement is a contract that shapes and governs many aspects of the relationship such as franchisor control; training; ongoing franchisee fees or royalties; licensing issues; franchisor expertise, support and service; geographical or territorial restrictions; advertising; and more.

Franchise disclosure statements

Before offering a franchise agreement, the franchisor must carefully create a franchise disclosure statement required by law to cover more than 20 relevant subjects, including:

  • Franchisor name and related entities
  • Persons involved with biographies
  • Bankruptcy information
  • Fees and payments
  • Related litigation
  • Intellectual property like trademarks, patents, copyrights and more
  • Restrictions
  • Party obligations
  • Expected franchisee investment
  • Financial information
  • Dispute resolution plan
  • Franchise agreement termination, assignment and renewal terms
  • Existing franchisee list
  • Provision governing which jurisdiction’s law applies to the agreement (choice-of-law clause) and which court will be utilized in litigation over the agreement or relationship (forum selection clause)
  • And more

Appended to the franchise disclosure statement is the proposed franchise agreement, financial information and a list of existing franchisees.

Legal counsel important for franchisors and franchisees

Throughout the process, each party should rely on its own legal counsel for advice and guidance. Every document drafted or proposed should be meticulously written or reviewed by a skilled franchise lawyer for compliance with applicable laws and a level of clarity and fairness likely to prevent future conflict or disagreement about what was meant by the signing parties.

A franchise attorney can also assist in negotiation of franchise agreement terms on behalf of either side.

Keywords: franchise, franchisee, franchisor, franchise agreement, franchise disclosure statement