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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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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