As a franchisee, if you are wondering about the consequences of ceasing to pay royalties, this likely means one of two things: Either (i) you are facing a dispute with your franchisor and you do not believe that you should have to pay, or (ii) you are unable to pay your royalties and pay your business’s other monthly expenses. While your desire to withhold payment of royalties (and potentially your advertising fund fees as well) is understandable, there are several reasons why this is not likely to be a good idea. The Risks of Withholding Royalties as a Franchisee Nonpayment of royalties is almost certainly considered a material default under the terms of your franchise agreement. Franchisors aggressively protect their “right” to payment, and many franchisors will not hesitate to declare a default when a royalty check or electronic funds transfer (EFT) doesn’t come through. Most franchise agreements also include a “no offset” provision, which states that the franchisee does not have a right to withhold payment on the grounds that it is owed money from the franchisor. So, if you stop paying your royalties, sooner or later your franchisor will declare a default; and, not only could you be on the hook for your outstanding royalties, but potentially for lost future royalties as well. What if I Have a Claim Against My Franchisor? What if you have a claim against your franchisor? What if your franchisor has not provided the support it promised? Or, what if your franchisor granted […]

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Buying an existing franchise is a unique business opportunity that comes with unique legal considerations. It blends aspects of buying a new franchise with aspects of buying an independent business, and addressing the risks involved requires thorough due diligence combined with an in-depth understanding of the legal issues at play. Here are six preliminary issues to consider if you are thinking about buying an existing franchise: 1. Conditions on Transfer In order to sell (or “transfer”) a franchise, the existing franchisee and the prospective buyer must meet the requirements set forth in the existing franchise agreement. These requirements are typically structured as “conditions,” and franchisors almost universally reserve broad rights to approve and reject proposed transfers. Some typical transfer conditions include: Cure of any outstanding defaults under the franchise agreement; Franchisor approval of the prospective buyer; Updating to then-current system standards; Compliance a franchisor right of first refusal; and, Buyer execution of the franchisor’s then-current franchise agreement. 2. Negotiating the Franchise Agreement In most cases, when you buy an existing franchise, you will be required to sign the franchisor’s then-current franchise agreement. It is critical to review the terms before signing, and you should not assume that the franchisor’s current terms are identical to those in the seller’s agreement. Franchisors routinely update their standard franchise agreements in order to adopt new franchisor-friendly protections, and there may be new or old provisions that you should try to negotiate. 3. Term and Renewal Even if you are required to sign the franchisor’s […]

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For prospective franchisees with sufficient access to capital, entering into an area development agreement or a multi-unit development agreement can seem like a smart investment. A multi-unit opportunity will allow you to leverage what you learn about the system through economies of scale while protecting your geographic region from competition from other franchisees, and it will make it more difficult for the franchisor to push you out in the event that you do not see eye to eye. While a multi-unit development opportunity can be a profitable investment for the right franchisee under the right set of circumstances, these types of franchise opportunities raise some unique legal issues as well. These issues include the following: Multi-Unit Franchisee vs. Subfranchisor Although there are numerous variations, most multi-unit development opportunities fall into one of three categories. They involve either (i) direct development of multiple franchised outlets; (ii) serving as a “subfranchisor” in your region; or (iii) an option to either own or subfranchise your allotted number of franchises. Operating as a multi-unit franchisee and serving as a subfranchisor are two very different businesses; and, if you pursue the subfranchisor route, you will need to comply with the applicable federal and state registration and disclosure requirements. Right to Develop vs. Obligation to Develop When pursuing a multi-unit development opportunity, it is important to maintain realistic expectations. Entering into an area development agreement or multi-unit development agreement will typically not only give you the right to open multiple outlets (subject to various conditions), but […]

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In recent months, Panera Bread has experienced a massive data breach, Domino’s Pizza has been embroiled in a visa fraud scandal, Waffle House’s former CEO has gone on trial for alleged sexual extortion, and there have been reports of “mayhem” within the Subway franchise system. When franchises make headlines for the wrong reasons, what are the implications for franchisees, and what rights, if any, do they have available? When Bad Publicity Affects the Entire Franchise System While it may have previously been the case that there was no such thing as bad publicity, that old adage does not necessarily hold true today. In today’s world of click-bait headlines and instant social media backlash, bad news (or apparent bad new) can spread quickly, and this can have devastating impacts for businesses. Particularly when customers do not understand the nature of franchising, when the franchisor – or even a single franchisee – does something to cause an uproar, it can affect sales at franchised outlets across the country, if not around the world. Take, for example, the recent data breach at Panera Bread. According to the Washington Post, some experts are estimating that as many as 37 million customers may have had their personal information compromised due to a vulnerability in the franchisor’s website. With its premium pricing and notoriously-long lunch lines, Panera Bread’s loyalty program and online ordering have become key benefits for many customers. But, will customers be willing to put their privacy at risk to save time and a […]

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What are your rights as a franchisee? Whether you are looking for more ways to grow your business or facing a potential dispute with a franchisor, this is a very important question. While you own your own business, you and your franchisor are inseparably intertwined, and your rights are largely dictated by the terms of your franchise agreement. However, there are various laws that apply to the franchise relationship; and, depending on where you operate your franchise, you may have additional protections under your state’s franchise law as well. Then, there are the general rights that exist by virtue of the fact that your franchise agreement is silent on certain subjects. Q&A with Franchise Attorney Jeffrey M. Goldstein Q: Are franchisors required to impose uniform standards on all franchisees? As a general rule, franchisors can impose different standards on different franchisees. While uniformity is one of the hallmarks of the franchise model, there are a variety of reasons why some franchisees may be subject to different standards than others. For example, franchisees in urban areas may need to do more to stand out from their competition than those in rural towns. Or, some franchisees may have negotiated additional protections into their franchise agreements. However, there are limits on franchisors’ ability to treat franchisees differently. Providing disparate treatment without a justifiable basis may constitute franchise discrimination. Franchise discrimination is a violation of franchisees’ rights, and legal remedies are available. Q: Do I have the right to negotiate my franchise agreement? Yes, […]

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Can you get wealthy by owning franchises? Undoubtedly, the answer is yes. Some franchisees are able to make significant sums of money, and they build careers as serial franchise owners. According to an article on Forbes.com, the largest restaurant franchisee in the world, Greg Flynn, has nearly $2 billion in annual revenues. The article goes on to list nine other franchisees that bring in over $500 million per year. However, for every Greg Flynn, there are countless franchisees who is struggling to make payroll or pay rent. For each of these struggling franchisees, there is another franchisee who has already failed. According to the Small Business Administration (SBA), franchisees fail at approximately the same rate as independent business owners, which means that roughly half of all franchises go out of business within the first five years. Also, keep in mind that Flynn owns 800 restaurants, has relied heavily on institutional capital, and has a team of professionals working for him behind the scenes. But, let’s assume that you are planning to start small, and that you don’t need to make hundreds of millions in order to consider yourself wealthy. What do you need to do in order to make your first franchise a success? Aside from having a sound financial plan, you also need to address the legal issues involved. For example: 1. Protect what you own currently. When you own a business that is open to the public, there is a chance that you will get sued. If you […]

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Deciding whether to buy a franchise or start an independent business requires consideration of a variety of legal, financial and practical considerations. While many people find success as franchisees, a significant percentage of franchisees fail. Of course, many independent businesses fail as well. In fact, according to the Small Business Administration (SBA), failure rates of franchised outlets and independent businesses are roughly equal. When trying to decide between buying a franchise and starting an independent business, here are some important considerations to keep in mind: 1. What is your business background? If you start an independent business you will, by definition, be on your own. Unless you have a natural business acumen, without a significant business background, you may struggle to find success independently. This is especially true with a brick-and-mortar business such as a convenience store, which requires you to lease retail space, hire employees, and maintain a sizeable inventory. However, you need business savvy to operate a successful franchise as well. Even when you are propped up by an established business model and have a real-world-tested system for running your business (all franchises should offer this, but not all of them actually do), you still need to make the day-to-day decisions. If you don’t know how to run a business, you are likely to struggle regardless of whether you choose to operate independently or as a franchisee. 2. What does the market demand? For certain types of businesses, operating under a franchised brand can offer a significant advantage. […]

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If you have been looking for information about your rights as a franchisee online, you may have come across something called the, “Universal Franchisee Bill of Rights.” While this sounds promising, unfortunately, it does not actually grant you any rights as a franchisee. As stated by the Coalition of Franchisee Associations (CFA): “This Universal Franchisee Bill of Rights is a fairness doctrine. It has been developed by franchisees in multiple systems and industries to identify the basic terms of fairness that are missing in their franchise agreements, and [that] must be restored to ensure the success and growth of the[ir] franchise systems.” In other words, rather than providing franchisees with legal protections, the Universal Franchisee Bill of Rights reflects protections that are absent from most franchise relationships. As a result, reviewing the Bill of Rights is not an exercise in understanding how you are protected, but rather in understanding the risks involved in buying a franchise. Summary: Universal Franchisee Bill of Rights There are 13 provisions in the Universal Franchisee Bill of Rights: Freedom of Association. You should have the right to communicate and pool resources with other franchisees. Good Faith and Fair Dealing. While some states have franchise relationship laws that impose a requirement of good faith and fair dealing, this protection is absent from most franchise agreements. Uniform Application of Brand Standards. Franchisors should enforce system standards equally and a non-discriminatory manner. However, discrimination is a common practice in many franchise systems. Full Disclosure Regarding Fees Collected from […]

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When considering franchise opportunities, there are numerous factors that go into making a profitable investment. From the franchisor’s reputation to your own personal desire to operate a particular type of business, the more boxes you can check, the more likely you are to find success as a franchisee. Of course, success is never guaranteed. In fact, data from the Small Business Administration (SBA) indicate that about half of all small businesses fail within the first five years, and this includes franchises. So, if you are thinking about buying a franchise, what can you do to increase your chances of success? Here are some tips from the franchisee attorneys at the Goldstein Law Firm: Finding Success as a Franchisee: 7 Tips for Potential Buyers 1. Due Diligence Before buying a franchise, it is critical to gather as much information as possible. Make sure you read (and understand) the FDD and franchise agreement, avoid relying on information the franchisor provides you orally, and prepare a thorough list of questions to ask current and franchisees. 2. Financial Planning How will you fund your initial investment? How will you fund your first six or twelve months of operations? Many franchisees fail because they do not have adequate financial resources to stay afloat during periods of unprofitability. 3. An Informed Buying Decision The decision to buy a franchise should be based on facts, not a blind desire to “be your own boss,” and not the promotional materials provided by the franchisor. If you do not […]

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You have spent the last five years (or longer) learning the business and building a reputation in your local community. Your franchise agreement is about to expire, and you want to begin operating independently. There’s only one problem: Your franchise agreement includes a non-competition covenant which states that you can’t operate a similar business in your geographic area for the next several years. So, this begs the question, “Is the non-competition clause in your franchise agreement enforceable?” As a General Rule, Non-Competition Clauses Are Enforceable In the context of business-to-business contracts, the general rule is that non-competition clauses are legally enforceable. This is an acknowledgment of the fact that there are certain circumstances in which a company can have a legitimate business interest in preventing competition. For example, if a company supplies information about a proprietary business system and allows someone else to use its brand to grow a business (sound familiar?), it may be fair for that company to prevent competition for a limited period of time. Possible Exceptions to the Enforceability of Franchise Agreement Non-Competes However, the protections available to franchisors through the use of non-competition covenants are not absolute. For example, franchisees may be able to avoid (or limit) their competitive restrictions based upon: 1. State Law Prohibition on Enforceability The laws regarding enforceability of non-compete provisions vary from state to state. California’s law is one of the least favorable to companies seeking enforcement, as it flatly prohibits competitive restrictions in certain types of relationships. While the […]

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