Blog

The Franchise Disclosure Document (FDD) is a legal document that franchisors are legally-required to provide to new franchisees at least 14 calendar days (or longer in some states) before they sign a franchise agreement. While scouring the pages of an FDD can seem like a daunting task, state and federal laws require franchisors to provide prospective franchisees with these documents for a reason, and anyone considering a potential franchise opportunity should be sure to carefully review all 23 “Items” of the franchisor’s FDD. Still not sure that you want to try to conquer the FDD? Here are 10 reasons why it will be worth your time: 10 Reasons to Read Your Franchisor’s FDD 1. You Can Learn about the Franchisor’s History and Key Personnel How long has the franchisor been franchising? What experience do its executives and key personnel have both (i) in the business being franchised, and (ii) in the franchise industry? You can find these answers in Items 1 and 2 of the FDD. 2. You Can Find Out if the Franchisor Has Been Sued Is the franchisor in litigation with any of its franchisees? Is it facing a lawsuit that could lead to insolvency? Items 3 and 4 of the FDD include important information about litigation and the franchisor’s bankruptcy history (if any). 3. You Can Find Out How Much You Have to Pay Items 5 and 6 of the FDD disclose the fees you will need to pay to the franchisor (including the initial franchise fee, […]

Read More

What makes a good franchisor? It is a simple question, but most people have different answers. Do you value strong operational support? Or, do you prefer to operate under an established brand but to otherwise be left alone? Do you want your franchisor’s executives to be franchise-industry veterans? Or, are you looking for an innovative opportunity that has gained traction by breaking the mold (within the confines of the highly-regulated franchise industry)? If you are considering a first-time franchise opportunity, it is understandable that you are looking for guidance on the factors to consider when evaluating prospective franchisors. Here are some tips that may help you in making an informed decision: 5 Tips for Evaluating Prospective Franchisors 1. Assess the Owners’ and Executives’ Experience When you are relying on a franchisor for success, the people behind the company matter. Some franchisors are owned and run by individuals who were successful in building a brand and business model, but who lack any prior knowledge or experience in franchising. Then, there are the franchisors that hire industry veterans who have previously built and sold large franchise systems. One option is not necessarily better than the other, and you need to decide what you value most in the leadership of your franchise organization. You can find information about the franchisor’s owners, executives, directors and managers in Item 2 of the Franchise Disclosure Document (FDD). 2. Consider the Number of Years the Franchisor Has Been Franchising The age of the franchise system may be […]

Read More

Whether you are considering a franchise opportunity or you are facing potential arbitration or litigation with your franchisor, you need experienced legal representation. The franchise relationship is rife with legal implications, and overlooking issues or making uninformed decisions can have potentially-drastic consequences for unexpecting franchisees. But, just like franchise opportunities, not all franchise lawyers are alike. So, how do you choose the right type of franchise lawyer to meet your needs? Relevant experience should certainly be among the driving factors, and you can learn a lot about a franchise lawyer by the scope and focus of his or her practice. What are the Four Kinds of Franchise Lawyers? 1. Lawyers that Handle Franchise and Non-Franchise Matters The first type of franchise lawyer is one who handles franchise-related legal issues as part of a broader practice. For example, many lawyers represent clients facing a wide range of business-related issues, including those specific to franchising. While this type of practice can be good for clients who need general business advice or who face a wide range of legal issues on a daily basis, due to the complexities of franchising, franchisees will often be able to obtain more nuanced and in-depth advice from a franchise-specific attorney. 2. Lawyers that Represent Franchisees and Franchisors The majority of true franchise lawyers represent both franchisees and franchisors. The reason for this is often financial: While there are far more franchisees than franchisors, franchisors have “deep pockets” and the need for ongoing legal representation. As a result, […]

Read More

If you are considering a venture into the world of franchising, there is a lot you need to know. From practical considerations (i.e. Do you have the drive to grow a successful business?) to financial ones (i.e. How much can you reasonably expect to make as a franchisee, and is it enough?), buying a franchise is not a decision to be made lightly. Then, there are the legal aspects. A franchise is a legal relationship governed by a complex (and franchisor-friendly) franchise agreement and a variety of general, franchise and industry-specific laws. To protect their financial interests and ensure that they have as many rights as possible, it is imperative that prospective franchisees give due consideration to the relevant legal issues during the franchise buying process. These resources provide an introduction to many of the legal issues that are important to franchisees: 1. Why Buy a Franchise? Have you asked yourself, “Why do I want to buy a franchise?” It is an important question, and one that gets overlooked with surprising frequency. Often, potential buyers get hooked on the idea of hitting the ground running while still running their own businesses, or they get sold on a particular franchise opportunity without stopping to truly consider the long-term implications. Buying a franchise can certainly have benefits, but these benefits come with risks as well. We examine both sides of the issue in: Why Buy a Franchise? 2. Big or Small (and Does It Matter)? Are you considering a national brand, or […]

Read More

As a franchisee, you are subject to a host of obligations. Many of these obligations are also subject to strict deadlines, and franchisees can face significant consequences (including possible termination) if they fail to meet their obligations within the timelines their franchisors prescribe. While all franchise agreements are unique (and franchisees should seek legal advice tailored to the unique provisions of their signed contracts), the following are six common deadlines that apply to franchisees: 1. Commence Operations Franchise agreements will commonly include provisions that require franchisees to commence operations within a specified period of time. Take too long to get up and running, and you may find that your franchise rights are already in jeopardy. While these provisions are theoretically designed to protect franchisors in the event that a franchisee locks in an exclusive territory and then decides to delay opening for business, they are ripe for abuse – especially if a more-attractive franchise candidate comes along. 2. Pay Royalties and Marketing Fund Fees Royalty and marketing fund fees are due monthly in most cases, and many franchisors require their franchisees to establish connectively for automated electronic payments. But, if you are actively submitting payment each month, or if your cash flow is such that your account balance may be too low when your fees are due, you need to make sure you know when you need to pay in order to avoid default (and possible termination). 3. Provide Notice of Intent to Renew Franchise renewal provisions can be inordinately […]

Read More

As reported in a recent article on franchise news site BlueMauMau.org, pizza franchise Little Caesars is launching a pilot program that it plans to roll out to franchised locations nationwide in 2018. The program includes a new app ordering process and in-store “Pizza Portals.” Once a customer places an order through the app, “[t]he app will notify the customer when the order is ready . . . they skip the line and go directly to the Pizza Portal and punch in a 3-digit pin or scan a QR code. Then the door on the customer’s secured compartment opens and they take their hot, fresh order.” According to the franchisor’s president and CEO, “We changed the pizza game when we introduced HOT-N-READY. We think RESERVE-N-READY featuring our breakthrough Pizza Portal has the potential to do it again.” When Are Franchisees Required to Adopt New Technologies? While Little Caesars franchisees are likely already contributing to the cost to update the Little Caesars app through their royalties (and potentially other fees as well), when it comes to installing the Pizza Portals in their stores, franchisees are likely to bear the full financial burden. Franchise agreements commonly include provisions requiring franchisees to adopt system-wide changes at their own expense, and this includes adopting new technologies. Although some franchisees will find success negotiating limited requirements to update, uniformity is a hallmark of the franchise model, and franchisors typically prefer to reserve broad rights to impose their will on their franchisees. What are the Risks of […]

Read More

You are planning to buy a franchise, and one of the benefits you are most looking forward to is the fact that you will have an exclusive territory. Once you sign your franchise agreement and pay the initial franchise fee, you will be the only one operating under your franchisor’s trusted brand and proven business system for miles around. But, is your territory really exclusive? Not all franchisors offer exclusive rights, and those that do not are not necessarily forthcoming about the limited protections they offer (if they offer any at all). Here are some important considerations to keep in mind when trying to interpret the territory provision of your franchise agreement: 4 Ways Territory Rights Not Be What They Seem 1. Your Territory is Protected but Not Exclusive. Many franchisors offer territory rights that are protected but fall short of being truly exclusive. The most common example of this is a reservation of rights for the franchisor to sell, “through alternate channels of distribution.” The territory may even be labeled as “exclusive,” and then have this carved out as an exception. 2. Your Territory is Not Protected at All. Some territory provisions are written to exclusively protect the franchisor. Consider this: “Franchisee’s territory (the ‘Territory’) is the geographic area within a two-mile radius of the franchised outlet. Franchisee may not sell outside of the Territory without Franchisor’s express written consent.” This provision “grants” a territory, but what does it really say? There is no protection, and all it really […]

Read More

In a previous article, we highlighted the importance of asking questions during the due diligence process, and we discussed four types of issues that demonstrate why franchisees should not rely on franchisors’ Franchise Disclosure Documents (FDDs) and marketing materials alone. We also mentioned the importance of talking to both current and former franchisees. This article covers some basic tips and questions to ask when contacting current and former franchise owners. How to Find Current and Former Franchisees But, before we get ahead of ourselves, how do you contact current and former franchisees? Fortunately, the requirements of Item 20 of the Franchise Disclosure Document (FDD) make this simple. In Item 20, franchisors must disclose contact information for: Current franchisees, Franchisees who have left the system within the past year, and Franchisees who have not communicated with the franchisor within the past 10 weeks. When contacting these individuals, keep in mind that they may have additional references as well. They may have an older version of the FDD that they are willing to share; or, they may know of other current or former franchisees who can impart particularly-valuable information. Questions to Ask Current and Former Franchisees During Due Diligence Once you start reaching out to current and former franchisees, what types of questions should you ask them? Here are some general recommendations: 10 Questions for Current Franchisees Has the franchise opportunity met your expectations? In what ways is operating your franchise different from what you expected? Are you consistently able to meet […]

Read More

When exploring franchise opportunities, it is easy to become committed to a particular brand and system early in the process. When this happens, for many people the due diligence process becomes a formality – a way to find affirmations that you have already made the right decisions. But, this can be a mistake. Many franchisors rely on their ability to make a good first impression, and they do not want prospective franchisees to dig deeper into the system. They do not want prospects to ask about things like carve-outs from their territorial rights, and they do not want them to have the insights of existing and former franchisees. Yet, these are precisely the types of information that are required in order to make an informed decision during the franchise buying process. If you are preparing to buy a franchise but have not yet performed your due diligence, here are some key questions you will want to ask before you sign: Questions for the Franchisor 1. What are my territory rights? Some franchisors offer exclusive territories, some offer protected territories, and some offer territories with no protection at all. Even “exclusive” territories will often be subject to exceptions. If your franchise agreement is not crystal clear on the definition of your territory, this is something that you will almost certainly want to have addressed before you pay your initial franchise fee. 2. How often do you make system-wide changes? Many franchisors – especially newer ones – make constant changes to their […]

Read More

If your experience as a franchisee has not gone as you hoped, you may be facing the prospect of termination. When it comes to protecting your rights as a franchisee, taking legal action prior to termination can help ensure that you have as many options as possible. So, how do you know if your franchisor is planning to terminate? While not necessarily determinative, here are five common signs that a termination notice may soon be arriving at your franchise’s door: 1. You Cannot Get in Touch with the Franchisor. If the franchisor’s representatives have suddenly become unresponsive, this may be a bad sign. When franchisors are planning to terminate a franchise, they will often (quickly) devote their resources elsewhere, and they may even have concerns about communicating in the face of potential litigation. 2. You are Being Treated Differently Than Other Franchisees. Along with lack of communication, other forms of disparate treatment can be potential warning signs of impending termination as well. For example, if other franchisees are rolling out new promotional materials, or if they are being asked to adopt updated system standards, being left out could be a sign that the franchisor is not planning to keep you in the system long-term. 3. You are Struggling with the Renewal Process While the renewal process can be a challenge even under the best of circumstances, if you are struggling to renew your franchise, there may be a reason why. The franchisor may want you out of the system, and […]

Read More