Owning a franchise comes with many obligations. If you fail to meet your obligations as a franchisee, this can have varying consequences depending upon the specific issue and circumstances involved. Many of these obligations and consequences arise out of “non” clauses in the franchise agreement. Here, franchise attorney Jeffrey M. Goldstein explains what prospective and active franchisees need to know: 1. Non-Encroachment If you buy a franchise with a protected or exclusive territory, you will need to respect other franchisees’ territorial rights as well. This obligation typically appears in the form of a “non-encroachment” provision in the franchise agreement. If you encroach on another franchisee’s territory, you could face consequences up to and including termination of your franchise. Conversely, if a franchisee (or the franchisor) encroaches on your territory, then you may be able to enforce your right to non-encroachment. 2. Non-Competition When your franchise agreement ends (whether through expiration or termination), you will almost certainly be subject to a “non-competition” covenant. These covenants can vary widely in terms of their substantive scope, geographic scope, and duration. However, non-competition covenants are generally enforceable (with some exceptions), and franchisors will often vigorously enforce former franchisees’ non-competition obligations. 3. Non-Solicitation Many franchise agreements contain “non-solicitation” clauses in addition to non-competition clauses. These clauses prevent former franchisees from contacting their customers for business-related purposes. As a franchisee, “your” customer list actually belongs to your franchisor; and, once your franchise ends, you are no longer able to use the list (even if you have […]

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If you are thinking about buying a franchise, you probably have a list of factors that you are using to build a list of the brands you want to consider. The initial investment, royalty rate, number of local franchisees—these are all important considerations when choosing the franchise opportunity that makes the most sense for you. But, when you hire a franchisee lawyer to review your Franchise Disclosure Document (FDD), what are some of the issues that he or she will consider “red flags”? 5 Examples of Legal Issues that Could Spell Trouble for Prospective Franchisees A franchisee lawyer reviews an FDD from a very different perspective than a prospective franchisee. For example, here are five potential “red flags” from a franchisee lawyer’s point of view: 1. A History of Litigation (Especially Involving Franchisees) Most prospective franchisees skip over Item 3 of the FDD. However, from a franchisee lawyer’s perspective, the litigation disclosures in Item 3 can be extremely important. This is especially true if the franchisor has a history of litigating with its franchisees, although any significant amount of litigation could mean that the franchisors’ focus and resources will be shifted away from supporting franchisees and growing the franchised brand. 2. An Inexperienced Leadership Team Many franchise systems grow out of successful retail businesses. If your franchisor owned a successful business and then decided to franchise, lack of experience in franchising—as indicated in Item 2—could potentially present a concern. 3. Lack of a Registered Trademark One of the main reasons […]

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When buying a franchise, it is important to hire a franchisee attorney to review the Franchise Disclosure Document (FDD) and negotiate the franchise agreement. You have heard this advice plenty of times before. But, is it really necessary? What are the chances of a legal issue actually putting your franchise at risk? Given how much you are investing already, couldn’t you save some money and just accept the terms of the franchise agreement as they are written? When buying a franchise, conducting thorough due diligence, and negotiating your franchise agreement are two of the most important aspects of the process. To illustrate, let’s consider an example of what might happen if you sign the franchisor’s form agreement: You Need (or Want) to Cut Costs You’ve been operating your franchise for a while, and you have identified some areas where you could cut costs and increase your profit while also providing a better product or service to your customers. You decide to make some changes; and, just as your business starts to improve, you get a notice from your franchisor. You are in default of your franchise agreement because: You have purchased products from a company other than your franchisor’s designated supplier; You have deviated from the franchise system standards in violation of the Operations Manual; and, You started selling a new product or service without the franchisor’s approval. Not only must you revert to your franchisor’s “approved” less-profitable business model in order to save your franchise, but you must also […]

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As we close the books on a year unlike any other, we look ahead to a year that offers equal parts hope and uncertainty. What 2021 has in store remains to be seen; and, while we cannot predict the future, what we can do is reflect on the lessons we have learned throughout the year that was. In 2020, we published numerous articles on our blog covering a wide range of topics pertaining to the legal aspects of buying and owning a franchise. In addition to articles that touched specifically on the challenges presented by the COVID-19 pandemic, we published several evergreen resources for prospective and active franchisees as well. Here is a look back at 10 of our top posts from the year: 1. Is There Really Such a Thing as a Recession-Proof Franchise? In a moment of prescience, we published an article titled, Is There Really Such a Thing as a Recession-Proof Franchise?, before the COVID-19 virus began to take hold in the United States. 2. A.I. in Franchising: What Do Franchisees Need to Know? Before the pandemic forced businesses to immediately shift their focus to finding new and innovative ways to serve their customers remotely, artificial intelligence (A.I.) was widely viewed as one of the next big things in franchising. Could we see a renewed focus on A.I. in 2021? 3. COVID-19 has Killed My Business – May I Legally Terminate My Contracts? When the COVID-19 pandemic first took hold, many franchisees (and other business owners) understandably […]

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Buying a master franchise is a very different proposition from buying a single-unit franchise—or even entering into an area development agreement.  As a master franchisee, not only might you be tasked with opening one or more franchised outlets of your own, but you will also be responsible for selling franchises and managing independent franchisees within your master franchise territory. As a result, buying a master franchise involves legal risks above and beyond those involved with buying an individual franchise or the right to develop a particular geographic area on your own. Some examples of these legal risks include: FTC Rule and State Franchise Law Compliance As a master franchisee (also referred to as a “sub-franchisor”), you will be selling franchises in your territory. This means that you will take on the disclosure obligations of a franchisor, and you will be at risk of facing liability due to disclosure violations. Your franchisor will most likely provide you with a Franchise Disclosure Document (FDD) to use in your territory; and, if it does, you should be able to seek indemnification in the event that you are held liable as the result of an issue with the FDD. However, there is also a very good chance that this is a protection that you will need to seek to negotiate into your master franchise agreement. Master Franchise Agreement Compliance Speaking of the master franchise agreement, the terms of your master franchise agreement will be very different from the terms of any franchise agreements you […]

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If your franchise is up for renewal in 2021, you have an important decision to make: Will you seek to renew your franchise; or, is it time to move on? If you intend to renew your franchise, you will need to plan ahead; and, depending on when exactly your franchise agreement is set to expire, you may need to start planning now. When Do You Need to Provide Notice of Your Intent to Renew? In order to renew your franchise, you will need to provide your franchisor with notice of your intent to renew. The timeframe for providing this notice depends on the specific terms of your franchise agreement. Most franchisors require their franchisees to provide notice by a certain date (i.e. no later than 60 days prior to the franchise agreement’s expiration date). However, some franchise agreements establish specific time windows as well (i.e. between 90 and 60 days prior to expiration). When providing notice of your intent to renew, you must ensure that you provide notice at the right time—and you must ensure that your notice satisfies the franchise agreement’s substantive requirements as well. What are the Conditions for Renewal? In addition to providing adequate notice, you will likely be required to satisfy various other conditions for renewal as well. For example, some of the most common types of renewal conditions include: Being up-to-date on your royalty payments and marketing fund contributions; Being in full compliance with the franchisor’s current system standards; and, Paying a renewal fee. If […]

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Buying a franchise, like any other business investment, is a risky proposition. There is no guarantee of success; and, even if you are confident in your ability to build a profitable business based on the current economic circumstances, there is no guarantee that market conditions will remain constant. This is something that 2020 has made painfully clear. With that said, there are certainly steps that franchisees can take to improve their chances of growing a successful business. In an article titled, How Do I Make My Franchise Successful?, the International Franchise Association (IFA) outlines what it calls, “10 keys for franchise success.” While this is a bit of a hyperbole, many of the IFA’s tips are in fact pretty good. Here, franchise attorney Jeffrey M. Goldstein discusses some of the highlights: 1. “Make sure you have enough money.” The IFA’s first tip is also perhaps its most important. In order to succeed as a franchisee, you need to be able to invest the money required—whether you put up the money on your own or you obtain financing. You also need to be prepared to cover your operating expenses (and your own personal expenses) during the initial months of your franchise’s operations. In Item 7 of the Franchise Disclosure Document (FDD), franchisors generally recommend that franchisees have a certain amount of “additional funds” on hand to cover their expenses for the first six to nine months. The IFA recommends determining, “how much you will need to live on for at least […]

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The COVID-19 pandemic has you working from home; and, without your daily commute, you have a lot more time available in your day. Your employer has indicated that your shift to working as a remote employee will be permanent, and this has you thinking: How can you make the most of your newfound free time? Should you buy a franchise? One of the common perceptions about franchise ownership is that it is – or can be – a “hands-off” investment opportunity. If you hire the right people, your day-to-day involvement in the business can be minimal. But, can it be minimal enough that you can run your business while continuing to work full-time? As with most business and investment questions, the answer is, “Maybe.” Is it Really Possible to Be a “Hands Off” Franchisee? If you are thinking about buying a franchise and attempting to build your business while continuing to work for your current employer, here are some important factors to consider: 1. Some Franchisors Require Owner Involvement Some franchisors require their franchisees to be involved in the day-to-day operations of their franchises. If you are planning on hiring a manager to run your business, you will need to make sure you choose a franchise system that allows you to do so. 2. Building Your Business Will Take A Lot of Time While you may be able to hand over many of your day-to-day responsibilities to a manager eventually, you will need to be heavily involved during the pre-opening […]

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The COVID-19 pandemic has changed the way people buy products and services. People are shopping from home more now than ever before, and some market experts are forecasting that this will not change even once we have a vaccine that allows us to resume life as we knew it prior to 2020. With this in mind, is now the time to buy a mobile franchise? With more people relying on products and services to be delivered at their doorstep – not just now, but possibly for the foreseeable future as well – it may seem like an opportune time to invest in a mobile franchise. If you think this seems like a good business opportunity for you, here are some legal issues you will want to consider as you move forward:  5 Legal Factors to Consider Before Investing in a Mobile Franchise 1. Buying a Franchise is a Long-Term Investment Most franchise agreements have an initial term somewhere in the range of two to five years. Will the demand for mobile services truly be the same as it is today five years from now? 2. It Will Take Time to Recoup Your Initial Investment In addition to your initial franchise fee, buying a mobile franchise will most likely mean investing in a vehicle; and, depending on the nature of the franchise, you could potentially be looking at tens of thousands of dollars in additional initial investment as well. Will you be able to generate enough revenue from your mobile franchise […]

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If you are thinking about buying a franchise, you know that you need to make an informed investment decision, and you know that you need to go into your franchise opportunity eyes wide open. But, do you know what this actually entails? While most prospective franchisees have a general idea of the financial risks involved with buying a franchise, far fewer have an appreciation of the legal risks that have the potential to place their entire investment in jeopardy. What kinds of legal risks are we talking about? Here are five important legal issues not to overlook when pursuing a franchise opportunity: Issue #1: Inadequate Territorial Protections What is your understanding with regard to your territorial rights? Are you to receive an “exclusive” or “protected” territory? If so, what do these terms really mean? While lots of franchisors offer their franchisees some form of territorial protection, protections vary greatly between franchise systems, and you need to make sure your franchise agreement clearly defines the rights you are being granted. Issue #2: Insufficient Protections for Renewal When the initial term of your franchise agreement expires, will you have the ability to renew? While it is fairly standard for franchisors to offer their franchisees renewal rights, these “rights” are usually contingent upon satisfying a broad range of requirements. If the conditions for renewal in your franchise agreement are too franchisor-friendly, you may find yourself on the outside looking in when your initial term expires. Issue #3: Termination Risks for Late Payments and […]

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