Franchise Law
Franchisees
Entrepreneurs looking to start a business may be interested in buying a franchise rather than building a business from scratch. Franchises tend to have a proven concept, a loyal following, and a track record of success. The “franchisor” is an existing business that provides a special license to an entrepreneur as the “franchisee” to set up a new business using the franchisor’s business concept, products, services, branding, and operating systems. The starting point for anyone interested in purchasing a franchise is to review the Franchise Disclosure Document (the “FDD”), which consists of the following 23 disclosure items:
- The identity of the franchisor and any parents, predecessors and affiliates.
- Business experience of the franchise.
- Litigation (current and/or past).
- Bankruptcy (current and/or past).
- Initial fees to open the franchise.
- Additional ongoing fees to operate the franchise.
- Estimated initial investment cost to open the franchise.
- Services and products the franchisee is required to buy from the franchisor or its designated suppliers.
- Franchisee’s legal obligations.
- Whether or not the franchisor offers financing.
- Operating requirements and assistance offered by the franchisor.
- Whether the franchisee will be offered a protected territory and the scope of those protections.
- Status of franchise trademarks.
- Status of franchise patents, copyrights and other proprietary info.
- Whether the franchise requires active management by the franchisee (as opposed to allowing the franchisee to delegate daily responsibilities to a manager.)
- Restrictions on what the franchisee may or may not sell.
- Renewal, termination, transfer and dispute resolution requirements.
- Whether any public figures have been hired to promote the franchise.
- Whether the franchisor is making any financial performance representations, and if so, supporting details.
- Summary of franchised and corporate outlets over the prior three years and a projection as to future openings in the upcoming year.
- Franchisor’s financial statements.
- All contracts that the franchisor requires the franchisee to sign.
- Two copies of a signed receipt page, providing the franchisee received a copy of the FDD.
Services for New Franchisees
Assist with Due Diligence and Review of the Franchise Disclosure Document (the “FDD”)
As discussed above, your first step in conducting due diligence is to thoroughly review the FDD. Ideally, the FDD should tell you everything you need to know about the franchise you’re considering buying, from branding and marketing to vendors, operating procedures and accounting. Penwell Law is here to help you make sense of a voluminous amount of information and to discern the details most relevant to your situation.
Review and Negotiate Franchise Agreements, Leases & Financing
We will methodically go through the franchise agreement documents with you to ensure you understand their ramifications and to identify negotiation points. Although franchisors are required by law to treat franchisees similarly, there is typically room for compromise regarding issues like limiting your personal liability, the scope of territory protections, restrictions on transfers, extending the runway/timeframe for opening and extending cure times for potential defaults.
Additionally, you will likely need to lease space. This may entail negotiating terms with the both the landlord and the franchisor. We can help you navigate those potentially competing demands to ensure that your interests remain paramount.
Financing also plays a central role for new franchisees. Interest rates and other loan terms have far-reaching impacts on the future of your business. You should think through whether you’re willing to offer a personal guaranty and the extent to which the assets of your business will be used as collateral to the secure the loan. Your franchise agreement may also contain financing restrictions. For example, lenders may be precluded from taking over your franchise absent the written consent of the franchisor. If this is the case, you need to make sure you’re not making conflicting representations in your lending documents versus your franchise agreement. We can help you identify and address these types of conflicts at the outset.
Assist with Compliance Obligations
Once you become a franchisee, you will have ongoing legal obligations and rights, including franchise renewals, non-competition/solicitation restrictions, confidentiality requirements, profit-sharing with the franchisor, and strict parameters around authorized vendors, suppliers and the types of products and services you may sell. Penwell Law is here to help you manage all of these details and troubleshoot any issues that arise.
Contact the Penwell Law Team!
Our team is happy to answer your questions and set up a free initial consultation to discuss your franchising needs. Please email us at [email protected] or book an appointment with us here:
Services for New Franchisors
Draft Your FDD
As discussed above, the Federal Trade Commission requires the FDD to contain 23 disclosure items intended to educate potential franchisees about the nature and operation of your business. One of our initial steps will be to help you identify any information that your business may need to develop in order to fully complete its FDD and comply with the Federal Trade Commission Guidelines. For example, you may need to secure copyrights or trademarks around your logos and branding, or shore up the documentation regarding the relationships between your business and its affiliates or parent entities. Equally important, there are a number of control issues to consider, such as (i) whether you will accept “passive” franchisees (wherein the owner delegates the daily operations of the business to a manager), (ii) the extent to which you want to control supply chain and vendor choices; (iii) the type of training you will require of franchisees; and (iv) what quotas you want to implement to ensure floundering franchisees don’t harm the reputation of your business (and on the flip side, what support you will offer to franchisees who are struggling.)
We have a great referral network to assist you with the FDD’s financial disclosure items, not only to help you prepare financial statements but also to project the fees and investment costs you should require of franchisees.
State Registration
Registration requirements vary widely from state to state. Some states, like Pennsylvania, require no notification, registration, review of the FDD or the payment of a fee. Some stares, like North Carolina only require that the FDD be submitted to the state annually and a registration bee be paid. Twelve states, like Virginia, require that the FDD be submitted to the state annually for review and comment before franchises can be sold in that state. We are familiar with the various requirements in all 50 states and are ready to advise you.
State Franchise Relationship Laws
Some states, like New Jersey, even if they don’t require review or registration of the FDD, have franchise relationship laws that govern franchising in their state as it relates to renewal, termination and dispute resolution. Many times these laws require disclosure of the parameters of the franchise relationship law in the FDD. Again, Penwell Law has dealt with most franchise relationship laws and are ready to advise you.
Draft your Franchise Agreement and Operating Manual
You must disclose all contracts you are requiring a franchisee to sign at Item 22 of the FDD. The most important of these contracts is the Franchise Agreement, which will govern the franchisor and franchisee’s rights and obligations. Franchisors are required to treat franchisees similarly. Thus, certain provisions will remain negotiable from franchisee to franchisee, but for the most part, the terms of this agreement should be consistent.
Contact the Penwell Law Team!
Reach out to Penwell Law ([email protected]) today for a free initial consultation or feel free to book your consultation directly here: [email protected]
