When buying a franchise, you are required to make a long-term investment decision based upon imperfect information. You cannot predict the future, and this means that you have no way of knowing whether you will ultimately succeed as a franchisee. However, what you can do is take steps to ensure that you are making as informed a decision as possible. Here are seven steps that will help you make an informed buying decision: 1. Submit a Franchise Application With most franchisors, the buying process starts when you submit a franchise application. While there is a good chance that your application will be approved, even this early stage in the process can tell you a lot about the franchisor. Did the application ask for relevant information? Did it appear to be a template, or was it custom-tailored to the franchise? How quickly and thoroughly did the franchisor respond to your questions and requests for additional information? Were you provided with a current copy of the Franchise Disclosure Document (FDD) and franchise agreement, and were you asked to sign a receipt? 2. Assess the Financial Viability of the Franchise Opportunity The FDD and franchise agreement should provide information about many (but not all) of the initial and ongoing costs of franchise ownership. At this point, you should prepare a pro forma and consider whether you will need to apply for financing from the Small Business Administration (SBA), a private lender or another funding source. 3. Hire an Attorney to Review the FDD […]

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As a prospective franchisee, it is important to set reasonable expectations. On the one hand, you do not want to expect too much and set yourself up for disappointment (or failure). On the other, you do not want to expect so little that you fail to give adequate consideration to the legal risks (and opportunities) involved with buying a franchise. 1. Franchise Agreement Negotiations Reasonable: Negotiating Overly One-Sided Provisions of the Franchise Agreement Let’s start with negotiating your franchise agreement. Yes, you can negotiate; and, yes, most franchisors will consider reasonable requests to modify the overly one-sided provisions of their agreements. For example, if your agreement contains a non-compete clause, you may be able to negotiate a carveout that allows you to start or work for a company relying on the skills you acquired before you acquired your franchise. Unreasonable: Negotiating System-Wide Standards and Terms However, most franchisors will not consider negotiating the standards that they apply to franchisees on a system-wide basis – think mandatory suppliers and obligations to comply with the Operations Manual. Negotiating these types of provisions could make managing the franchise system untenable; and, as a result, requests for modification will usually be non-starters. 2. Franchise Due Diligence Reasonable: Gathering Information from Current and Former Franchisees When conducting your due diligence, you can expect to receive valuable information from current and former franchisees. The types of information they provide may be different (for example, former franchisees may be more willing to speak negatively of the franchisor), […]

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If your background is in finance, tax, marketing or business administration, owning a franchise may be compelling for a couple of different reasons. Not only could owning a franchise mean running and managing your own business, but it could also mean using your background and experience to help other individuals and businesses. Depending upon exactly what you are looking for, there are a variety of different franchise opportunities available in the business and financial services sectors. Of course, all of these franchise opportunities present different risks, and choosing the best franchise for your individual circumstances requires thorough due diligence and a careful assessment of the Franchise Disclosure Document (FDD) and franchise agreement. For prospective business and financial services franchisees, here are five special considerations to keep in mind: 1. Approved Products and Services For many people, one of the appealing aspects of buying a franchise is having access to an approved (and presumably well-vetted) list of products and services. However, as a professional service provider, this may not necessarily fit your goals. Will you be comfortable limiting your product or service offerings based upon what the franchisor allows? Might you feel hamstrung by not being able to offer a full suite of services based upon your personal background and experience? These are issues that could significantly impact your level of satisfaction as a franchise owner. 2. Professional Liability (Errors and Omissions) If you will be providing professional advice to individuals or businesses, you may need to factor premiums for professional […]

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When buying a franchise, you need to make several important decisions that can have lasting implications for you and your business. Among them is the decision of whether or not to hire a franchise attorney. With all of the startup costs involved, hiring a lawyer to review the Franchise Disclosure Document (FDD) and franchise agreement may seem like one area where you can save some money (after all, aren’t you just going to end up signing the franchise agreement anyway?). But, while this is a choice some prospective franchisees make, their decision is usually based on a lack of understanding of the services an experienced franchise attorney can provide. 5 Risks of Signing a Franchise Agreement Without Legal Advice Along with numerous other ways an experienced franchise attorney can help you make an informed buying decision, here are five key risks your attorney will be able to help you avoid: 1. Not Knowing What You are Signing Buying a franchise is a long-term investment, and a franchise agreement is a long-term, legally-binding contract. Once you sign, you are bound to comply, and the odds are that you do not have a way out that does not involve incurring substantial financial liability to the franchisor. Before you sign, you need to know what you are signing, and you need to make sure you are comfortable with the legal and financial risks involved. 2. Not Negotiating One-Sided Provisions of the Franchise Agreement Franchise agreements are almost universally heavily one-sided in favor of […]

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Problem: As discussed in more detail below, although it is possible to achieve some measure of success in furthering the short-run goals of franchisees through the formation of franchise associations, achievement of the long-run goals of franchisees will nevertheless remain elusive, as they have for the last 25 years. Until franchisee associations develop the ability to understand and use more correct, accurate and dynamic theories underlying franchise market forces, they will be nothing more than temporary dues-collection entities. To explain this pervasive misunderstanding more fully, below I briefly posit the existence of two prototypical market models. (Of course, the markets as defined below are not pure nor are they complete; I defined and created the two crossbreed models below only for illustrative purposes). Franchise Model with Inherent Conflicts and Distorted Incentives (“Conflicts Model”) The Conflicts Model is one that I argued previously covers the franchise context. To create this model for illustrative purposes I’ve chosen and combined certain elements of both the neoclassical and transaction cost economics (“TCE”) theories to identify myriad “inherent conflicts” in the franchise market (and between stakeholders). Again, the neoclassical model shows, inter alia, that there is an underlying inherent conflict between the two major stakeholders since they maximize different variables, sales and profits. The implication of this inherent conflict is that franchisors and franchisees, in naturally seeking to achieve and maximize different market goals, will calculate different optimization levels of the same market variables. I gave the example of how this shakes out in an […]

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Many esoteric legal doctrines have evolved historically to blunt the impact of fraud accusations and claims, especially in franchise cases. These include the requirements that the false representation be of a material fact that a reasonable person would reply upon, and that the defendant know that his representation is false. Further, fraud usually cannot be based on a promise or failure to meet a promise (versus a fact) unless the promisor never intended to perform. In a recent case, the court applied all of these principles to reject a franchisee’s fraud allegations reasoning that the franchisee’s allegations were merely “a business deal gone bad.” Kiddie Acad. Domestic Franchising, LLC v. Wonder World Learning, LLC, Civil Action No. ELH-17-3420, 2019 U.S. Dist. LEXIS 56126, at *44-46 (D. Md. Mar. 31, 2019). In this regard, the Court summarized some of the franchisee’s rejected fraud claims: For example, counterclaimants contend that on May 9, 2011, during the couple’s visit to Kiddie Academy in Maryland, Commarota allegedly told the defendants that “‘his team’ would guide them through the entire construction process.” ECF 25, ¶ 24. As Kiddie Academy’s VP of Construction, Commarota held himself out as knowledgeable in construction and certainly knowledgeable in Kiddie’s construction process. The Amended Counterclaim alleges that Commarota’s statements were false because he knew that Kiddie “did not typically guide franchisees through the entire construction process” and, allegedly, Kiddie never intended to guide defendants. Id. ¶ 24. In addition, counterclaimants assert that Helwig and Wise falsely assured “Kiddie’s support,” and […]

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Covenants against competition or covenants not-to-compete are included in almost every franchise agreement. Disputes regarding the validity and enforceability of relevant post-term covenants usually arise when distribution, dealership or franchise agreements come to an end, either through a termination or expiration. Although courts are quick to recognize that restrictions on trade are spiritually disfavored under the US legal and economic systems, many of these same courts do not hesitate to grant a franchisor’s request to enforce one of these covenants when a franchisee decides to compete with its former franchisor at the end of the franchise term. From a litigation point of view, the franchisee’s motivation for his post-termination conduct can play a significant role in whether a court views the post-term covenant to have been violated. In a recent case, Handel’s Homemade Ice Cream & Yogurt v. Moonlight 101, Inc., United States Court of Appeals, 2019 WL 1466968 (6th Cir. April 1, 2019), the franchisee did himself no favors in this regard. In Handel’s, the Defendant, a Handel’s ice-cream franchisee, was on the verge of purchasing a second Handel’s franchise in addition to the one it had originally purchased and had been operating. During negotiations with the franchisor, the franchisee allegedly “informed Handel’s that he did not think he should have to pay a separate franchise fee for the new location, did not wish to sign another franchise agreement, and refused to provide a final lease of the proposed Gaslamp Location to Handel’s.” Consequently, Handel’s did not approve the […]

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