What Should Prospective Franchisees Take Away From Litigation Disclosures in Item 3?

Aug 31, 2018 - Blog by |

As a prospective franchisee, reviewing the terms of a franchisor’s Franchise Disclosure Document (FDD) is a critical early step in the due diligence process. When reviewing the FDD, it is important to review all of the 23 “Items” – not just the ones dealing with fees and the estimated initial investment. Among the more “legal” sections of the FDD that prospective franchisees frequently overlook is Item 3: Litigation. But, whether the franchisor provides a “negative disclosure” or details multiple ongoing pending lawsuits, Item 3 can often provide valuable insights into the risks of choosing a particular franchise opportunity. Potential Takeaways from the Item 3 of the FDD 1. An Item 3 “Negative Disclosure” If a franchisor does not have any litigation history that is subject to disclosure under the Federal Trade Commission’s (FTC) Franchise Rule, it must simply state in Item 3, “No litigation is required to be disclosed in this disclosure document.” While this is generally what you want to see as a prospective franchisee, it is important to note that not all types of lawsuits are subject to disclosure in Item 3 under the FTC Franchise Rule. For example, lawsuits that do not need to be disclosed in Item 3 include: Criminal actions that do not involve allegations of fraud; violations of franchise, antitrust or securities laws, or other “comparable allegations;” Civil lawsuits that are considered “ordinary routine litigation incidental to the business;” and, Bankruptcy proceedings subject to disclosure in Item 4. 2. Litigation Against Franchisees Under the […]

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Can a Franchisor Sell Franchises on a “Take It or Leave It” Basis?

Aug 24, 2018 - Blog by |

“Take it or leave it.” While hearing a franchise salesperson utter these words is less common than it used to be, high-pressure tactics remain a central component of the sales process in many franchise systems. Although buying a franchise is a unique and high-risk investment, franchisors use traditional methods to sell franchises, and their salespeople get paid on a commission basis. This means that they have a financial incentive to close as many sales as possible, and the last thing they want is for their commission to get held up due to franchise agreement negotiations. As a result, franchise salespeople will often imply that there is no room for negotiation in the franchise agreement. They may say things like, “Our franchisor doesn’t agree to changes,” or “We already offer better terms than any of our competitors.” Regardless of whether or not these statements are true (which is another matter entirely), the simple fact of the matter is that all franchisees have the right to make informed decisions and protect their investments. In fact, most good franchisors will not only be willing to negotiate reasonable modifications, but they will even expect quality franchise candidates to request changes to their standard terms. The reason for this is simple: Franchisors know that their agreements are heavily one-sided. They know that franchisees who accept their standard terms are taking a huge risk, and they know that they need to be reasonable in order to attract top talent. Key Risks of Signing a Franchise Agreement […]

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7 Special Considerations for Purchasing a Fitness Franchise

Aug 17, 2018 - Blog by |

Fitness franchises came into vogue about a decade ago; and, since then, the range of fitness-oriented franchise concepts available for purchase has exploded. From full-service 24-hour fitness centers to children’s gyms and rock-climbing centers, if you are looking for a franchise opportunity in the fitness industry, there is a very good chance that there are options available. Like all franchises, buying a fitness franchise comes with certain inherent risks. This includes risks that apply to the owning a franchise generally as well as risks that are unique to operating a fitness center or gym. If you are thinking about buying a fitness franchise, here are seven considerations to keep in mind: 1. Initial Term and Renewal Rights Opening a fitness franchise typically involves a sizeable initial investment. Remodeling costs, fitness equipment, point-of-sale equipment and other initial costs can easily reach the hundreds of thousands or millions of dollars. In order to protect this investment, it is important to ensure not only that the initial term of your franchise is sufficient, but also that you have adequate protections at the time of renewal. 2. Grounds for Termination In this same vein, it is also critically important to understand your franchisor’s rights of termination. Franchisors typically reserve broad termination rights, including the right to terminate for non-payment of minimum royalties, so you will minimally want to ensure that you have adequate cash on hand to meet your financial obligations without relying on income from your franchised business during your initial months of […]

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What Does it Mean if My Franchise Agreement Requires “Mandatory Arbitration”?

Aug 10, 2018 - Blog by |

Many franchise agreements include provisions requiring franchisees to submit to binding arbitration in the event of a franchisor-franchisee dispute. While these “mandatory arbitration” provisions are supposedly designed to minimize both parties’ costs in the event that a dispute would otherwise lead to litigation, the reality is that these provisions routinely serve franchisors’ interests to the detriment of their franchisees. What is Arbitration? Arbitration is a form of alternative dispute resolution (ADR) proceeding that falls somewhere in between mediation (where a neutral “mediator” helps disputing parties reach a consensus) and litigation (where a judge renders a binding decision in court). In arbitration, each party will typically conduct limited discovery, and then each party will present its case in the arbitration venue. The dispute may be heard by a single arbitrator or a panel of three (or more) arbitrators; and, at the conclusion of the proceeding, the arbitrator(s) will render a binding decision which, if necessary, can be enforced by obtaining a judgment in court. Where Does Arbitration Occur? Typically, franchise agreements will require arbitration proceedings to take place in the city where the franchisor’s headquarters are located. This usually means that franchisees are forced to incur travel costs in order to assert their legal rights (and this is one of the first ways that mandatory arbitration provisions tend to work in the franchisor’s favor). Franchisors can also designate specific arbitration service providers in their franchise agreements, and hearings will typically take place at these providers’ office locations. Two of the most-commonly-used […]

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Hiring Considerations for Franchisees

Aug 3, 2018 - Blog by |

As a franchisee, you own your own business. This means forming your own corporation or limited liability company (LLC), taking on your own loans, entering into your own contracts, and being responsible for your own success or failure. For many franchisees, it also means hiring your own employees. The employment relationship is fraught with legal issues, so much so that there is an entire segment of the law (called “labor and employment law”) devoted to issues involving employers and employees—just as “franchise law” governs the relationship between franchisors and franchisees. However, the nature of the franchise relationship also has unique implications for employment; and, as a franchisee, it is critical to have a clear understanding of your employment obligations and your employees’ legal rights. Are You Preparing to Take on Employees as a Franchisee? There are textbooks, statutes, regulations and decades of court precedent dedicated to defining the employer-employee relationship. So, there is far more to hiring employees than we can possibly discuss here. As a franchisee, if you are preparing to hire, here are some of the basic principles you need to know: 1. Your Employees are Your Employees While there has been much discussion about franchisors’ exposure to liability for claims filed by franchisees’ employees, one principle that was never in doubt is that franchisees’ employees are franchisees’ employees. When you hire employees, you make the hiring decisions, you are responsible for making payroll and you are obligated to respect your employees’ regulatory, statutory and Constitutional rights. 2. […]

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Franchise Ownership is a Myth

Jul 21, 2018 - Blog by |

In a recent article “Do Franchise Owners Really Own a Business?” Keith Miller addresses franchise ownership head-on:  “Do franchise owners really own a business? That is a very important question. The franchise industry talks about franchise owners as independent business people, working for yourself, but not by yourself. But, what does ownership mean?” https://www.bluemaumau.org/do_franchise_owners_really_own_business Miller goes on to answer: “Usually, if you own something, you have value, or equity, that you can sell. Historically, most franchise agreements contained a “first right of refusal” clause. In most cases, if a franchise owner found a buyer for their franchise, they would first have to offer that to the franchisor under the same terms and conditions.  Unfortunately, for franchise owners, that has taken on a whole new life of its own, with new clauses that eliminate most, if not all, of the equity they have worked to gain in the franchise.” Miller’s insightful observations highlight how franchisor opportunism now blatantly expresses itself directly and explicitly in many current franchise agreements. So long as franchisees and potential franchisees continue to misinterpret (sometimes intentionally) this counterintuitive reality, they will perpetuate the very myth that systematically destroys franchisees on an ongoing basis. It can’t be emphasized enough that franchisees nowadays buy little more than a limited right to receive a token revenue stream for a restricted period of time. These minimal revenue streams frequently are insufficient to allow franchisees to pay all of the aggregate costs associated with their franchises. Under these circumstances it is incorrect […]

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5 Special Considerations for Purchasing a Restaurant Franchise

Jun 29, 2018 - Blog by |

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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I Received a Notice of Default from My Franchisor. What Should I Do?

Jun 22, 2018 - Blog by |

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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How Can a Franchise Lawyer Help During the Franchise Buying Process?

Jun 15, 2018 - Blog by |

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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What Would a Wage Hike Mean for McDonald’s Franchisees?

Jun 8, 2018 - Blog by |

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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