Despite significant growth in other sectors, restaurants remain the predominant force in the franchise industry. According to data published by the International Franchise Association, in 2017 roughly 220,000 of the 744,000 franchised outlets worldwide were quick-service and full-service restaurants. For individuals and business partners contemplating restaurant franchise opportunities, there are a number of important factors to take into consideration. This includes franchise-specific factors, restaurant-specific factors and factors that are relevant to all businesses, generally. From a legal perspective, some of the most-important factors include: 1. Site Selection For restaurant franchises, site selection is of paramount importance. When you are relying on a recognizable brand name to get customers through the door, you need your restaurant to be both highly visible and easily accessible. Nearby businesses are a relevant consideration as well. Are there stores nearby that will bring traffic to the area? Are there competing restaurants (or vacancies for competing restaurants) that will make it difficult to turn a profit? When negotiating your lease, these are just a few of the many issues you will want to address with your landlord. 2. Territorial Protection In the world of franchising, intra-brand competition is an important consideration as well. Ideally, your franchise agreement will provide true territorial exclusivity with a sufficient radius to protect you against losing customers to competing franchisees or the franchisor’s company-owned outlets. 3. Initial Investment and Upgrades Restaurant franchises tend to have large initial investments. When evaluating a restaurant franchise opportunity, it is important to conduct your own […]

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So, you received a Notice of Default. Whether it came as a surprise or was a long time coming, it showed up in the mail, and now you have to deal with it. What does the Notice of Default mean for the fate of your franchise? What are your legal rights? What are your franchisor’s legal rights? What options do you have available? This article provides a brief introduction to what you need to know. Steps to Take After Receiving a Notice of Default from Your Franchisor If you have received a Notice of Default from your franchisor, taking these steps will help you protect your investment and avoid mistakes that could lead to unnecessary termination of your franchise: Step No. 1: Assess the Validity of the Alleged Default As a franchisee, your legal rights are limited. Even if your state has a franchise relationship law, if you have committed a default, you could be at risk for losing your franchise. So, the first step after receiving a Notice of Default is to assess the validity of your franchisor’s allegations. Have you violated your franchise agreement (i.e. by not paying royalties)? Is there room for interpretation? Or, are your franchisor’s allegations entirely unsubstantiated? Step No. 2: Avoid a Knee-Jerk Response Regardless of whether you believe the Notice of Default is valid, you need to avoid a knee-jerk response. Too often, disgruntled franchisees attempt to retaliate or go public with their grievances on social media. In order to avoid an unnecessary […]

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If you have been doing your research on buying a franchise, you have no doubt heard that you need to hire a franchise lawyer to help you through the process. But, do you know why? If you have made up your mind and the franchisor only offers a standard “form” contract, what is the value in hiring a franchise attorney? Actually, there are several reasons why prospective franchisees need to seek experienced legal representation. Here are just some of the ways that a franchise lawyer can help during the franchise buying process: 1. An Independent Perspective As a prospective franchisee, the primary factors influencing your choice of a particular franchise opportunity are: (i) information you received from the franchisor, and (ii) your personal feelings about the franchise (and, perhaps to a lesser extent, its competitors). A franchise lawyer can offer an independent perspective. Are you viewing the opportunity through rose-colored glasses? Is the franchisor’s sales rep conveniently omitting certain information? An experienced franchise lawyer will be able to take a step back and take personal motivation out of the equation. 2. Industry Insights How does the franchisor really stack up against its competitors? Are its franchise agreement terms on par with those offered throughout the industry? Does the franchisor have a history of litigating with its franchisees? How is the franchisor viewed amongst its peers and industry professionals? While not all franchise lawyers will have these types of insights, one who has been in the industry for decades will have […]

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McDonald’s has been in the headlines recently, and not for re-launching the McRib or promoting new healthier side items. Instead, the fast food chain has been in the news because employees around the world have informally begun to demand higher wages in a movement being labeled as, “#McStrike”. While these types of movements usually garner public support, as is often the case, the realities of forcing higher wages at McDonald’s belie the storylines that make for good news. A mandatory wage hike would mean even more financial struggles for franchisees, and it may ultimately do more harm than good for the chain’s frontline workers. The Realities of a Mandatory Wage Hike at McDonald’s While most people tend to think of McDonald’s as a huge corporation with restaurants around the globe, the reality is that “corporate” McDonald’s only owns about 10 percent of the fast food chain’s stores worldwide. The remaining 90 percent are owned by franchisees, many of whom are “mom and pop” operators who have invested their life’s savings in a restaurant with a proven system and a well-known brand. But, despite McDonald’s ubiquity, for most of these franchisees, profit margins are razor thin. On top of making payroll while selling Dollar Menu food items, franchisees must also pay monthly royalties to McDonald’s, and they must constantly make updates and upgrades to accommodate new offerings and changes to the chain’s trade dress and system standards. While many franchisees are able to operate their stores for years, the reality is […]

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With most franchise systems, when you want to buy a franchise, you need to go through an application process. Franchisors use this process to gather as much information as possible about prospective franchisees, which they then use to weed out undesirable candidates. If you are thinking about buying a franchise, knowing what to expect can help the application process go more smoothly, and being prepared can increase your chances of submitting a successful application. What Do Franchisors Look for in Franchise Candidates? While some franchise systems have more-rigorous screening procedures than others, generally speaking, franchisors will rely on the following types of information when evaluating franchise candidates: 1. Education, Employment and Business Experience Franchisors will typically ask for information about prospective franchisees’ education, employment history and prior business experience, if any. While franchisors often expect their franchisees to be first-time business owners, having a business background can make you a more-attractive candidate (in addition to potentially increasing your chances of success as a franchisee). 2. Background Check Most franchisors will conduct criminal background checks as well. If you have a criminal record, it may be best to be up front about it with the franchisor and proactively address any concerns you have run into in previous situations. 3. Financial Documentation Whether you will be financing your franchise yourself or relying on funding from a bank, family member or private investor, you can expect the franchisor to request plenty of documentation about your source(s) of capital. Inadequate capitalization is among the […]

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The Food and Drug Administration’s (FDA) long-anticipated menu labeling requirements went into effect on May 7, 2018. These requirements apply to predominantly to restaurant franchisees. As explained by the FDA: “The menu labeling requirements apply to restaurants and similar retail food establishments that are part of a chain with 20 or more locations. In addition, they must be doing business under the same name and offering for sale substantially the same menu items.” So, if you own a restaurant franchise in a system with 20 or more outlets, you are likely subject to the new menu labeling law. What do you need to know? Franchisee Compliance with the FDA’s New Menu Labeling Requirements 1. The New Menu Labeling Law is Already Effective First, May 7, 2018 was the compliance date for restaurant owners to adopt the new labeling requirements. If you are subject to the law and you have not yet updated your menus, you should consult with an attorney about coming into compliance promptly. 2. The Law Applies to More than Just “Restaurants” The new labeling law applies to “restaurants and similar retail food establishments.” As explained by the FDA, this means that the law applies to all types of food service businesses. This includes: Bakeries Cafeterias Coffee shops Convenience stores Food delivery and take-out businesses Food service locations in amusement parks and other entertainment venues Full-service restaurants Grocery stores Quick-service restaurants Specialty food stores 3. As a Franchisee, it is Up to You to Comply As a franchisee, […]

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As a franchisee, encroachment by the franchisor or another franchisee can be among the greatest risks to long-term sustainability. If would-be customers (most of whom do not understand independent franchise ownership) have access to your brand at a more-convenient location, they will have little incentive to visit your store or restaurant. As a result, territorial protections are among the most-important protections available to franchisees, and state franchise relationship laws often provide critical protections when disputes regarding encroachment arise. A recent successful lawsuit filed by El Pollo Loco franchisees in California state court illustrates the types of protections that are available to franchisees in cases of encroachment: California Jury Rules in Favor of Husband-and-Wife Franchisee The case involved a dispute between husband-and-wife franchisees Michael and Janice Bryman and restaurant franchisor El Pollo Loco Inc. According to news reports, the Brymans sued after their franchisor opened two new locations within their territory. El Pollo Loco Inc. apparently did so in reliance on a standard provision in their franchise agreement which stated that it had the right to place company-owned locations “in the immediate vicinity of or adjacent to” its franchisees’ outlets, the franchisee’s territorial rights notwithstanding. Critically, prior to the jury verdict on damages, the trial judge ruled that this provision of the franchise agreement was unconscionable as a matter of law. As such, it was unenforceable, and could not be used to justify the opening of two company-owned outlets that competed directly with the franchisees’ restaurants. Subsequently, the jury also found […]

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When you buy a franchise, the terms of your relationship with the franchisor will primarily be governed by three documents: (i) the Franchise Disclosure Document (FDD), (ii) the Franchise Agreement and (iii) the Operations Manual. These are three very different documents that impact your rights and obligations in different ways, and having a basic understanding of each is one of the first steps toward understanding what you can expect as a franchisee. 1. The Franchise Disclosure Document When you apply to purchase a franchise, the franchisor will provide you with a copy of its Franchise Disclosure Document. The FDD is a federally-mandated form disclosure which consists of 23 “Items” and a series of exhibits or attachments. Although the form of the FDD is established by federal regulation and there are industry standards for the information that franchisors choose to disclose, the FDD should still be heavily-customized to reflect the unique terms of your chosen franchise opportunity. FDDs can be dense and difficult to digest. But, it is important that you take the time to understand the information disclosed (as well as the implications of any missing or “negative” disclosures). For help dissecting the FDD, you can read: Understanding Your Franchisor’s FDD – Part 1(Items 1 through 7) Understanding Your Franchisor’s FDD – Part 2(Items 8 through 14) Understanding Your Franchisor’s FDD – Part 3 (Items 15 through 23) 2. The Franchise Agreement The Franchise Agreement is the contract you sign when you purchase a franchise. This is a legally-binding and […]

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As a franchisee, there is a reasonable probability that, at some point, you will have a disagreement with your franchisor. Whether you think that advertising fund contributions could be better spent or you believe that the franchise system is failing as a whole, the longer you own your franchise, the more likely it will become that a dispute will arise. Not all disputes are grounds for litigation. Franchise agreements provide extraordinarily-broad protections to franchisors; and, in some cases, it simply will not be worth the cost to hire an attorney. But, franchise litigation is more common than many franchisees realize; and, if you think you may have a claim against your franchisor (or if you are concerned that your franchisor may take legal action against you), it is worth taking appropriate steps to prepare. What Not to Do When Anticipating Franchise Litigation When preparing for the possibility of litigation (or mandatory mediation or arbitration), knowing what not to do is just as important as knowing what to do. The following are all potentially-costly mistakes that franchisees should avoid when anticipating mediation, arbitration or litigation with their franchisor: 1. Stopping Payment of Royalties and Advertising Fund Contributions No matter how dissatisfied you may be with your franchisor, and regardless of whether your franchisor has violated the terms of your franchise agreement, you should not stop payment of royalties and advertising fund contributions unless advised to do so by your legal counsel. Even if your franchisor owes you money, you are not […]

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While franchisees’ transfer rights are usually subject to numerous conditions, franchisors typically reserve broad rights to sell the system. Franchisors do not need their franchisees’ consent to sell, and they are not required to cure outstanding defaults or consider the potential impact on franchisees when they seek to court the highest bidder. As a result, sales of successful franchise systems are common, with typical buyers including competing brands as well as private equity companies seeking to add assets to their portfolios. Earlier this year, Red Lion Hotels Corporation agreed to buy the Knights Inn franchise system from Wyndham Worldwide for $27 million. BrightStar Care also recently acquired the regional chain, HomeChoice Senior Care, for an undisclosed sum. While the consequences of these types of sales can vary, some of the potential implications for franchisees include the following: 1. Limited Options for Challenging the Sale Generally speaking, franchisees’ options for legally challenging the sale of a franchise system are limited. Franchise agreements almost universally include provisions acknowledging the franchisor’s right to sell; and, even though these provisions are extraordinarily one-sided, they will typically be enforced by the courts. It is standard for proposed sales and the terms of franchise system acquisitions to be kept confidential, so the “surprise” of learning that you will have a new franchisor is generally not sufficient grounds to pursue a claim for bad faith or fraud. There may be exceptions in limited circumstances (for example, if you recently purchased your franchise and specifically relied on representations […]

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