Franchise Articles

If you are thinking about buying a franchise, you know that you need to make an informed investment decision, and you know that you need to go into your franchise opportunity eyes wide open. But, do you know what this actually entails? While most prospective franchisees have a general idea of the financial risks involved with buying a franchise, far fewer have an appreciation of the legal risks that have the potential to place their entire investment in jeopardy. What kinds of legal risks are we talking about? Here are five important legal issues not to overlook when pursuing a franchise opportunity: Issue #1: Inadequate Territorial Protections What is your understanding with regard to your territorial rights? Are you to receive an “exclusive” or “protected” territory? If so, what do these terms really mean? While lots of franchisors offer their franchisees some form of territorial protection, protections vary greatly between franchise systems, and you need to make sure your franchise agreement clearly defines the rights you are being granted. Issue #2: Insufficient Protections for Renewal When the initial term of your franchise agreement expires, will you have the ability to renew? While it is fairly standard for franchisors to offer their franchisees renewal rights, these “rights” are usually contingent upon satisfying a broad range of requirements. If the conditions for renewal in your franchise agreement are too franchisor-friendly, you may find yourself on the outside looking in when your initial term expires. Issue #3: Termination Risks for Late Payments and […]

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On September 28, 2020, the Franchise Times released its list of the “Top 200+” franchises for 2020. The article announcing the release begins with a sobering proviso: “[T]his year’s Franchise Times Top 200+ may be the last look at the old world before 2020 results change everything.” As the International Franchise Association (IFA) recently reported, the franchise industry has been hit hard by the COVID-19 crisis, with more than 32,000 franchises closing in just the past six months. But, since the Franchise Times’ current Top 200+ list is based on 2019 data, the figures look pretty good. Franchise sales grew significantly last year, while the biggest brands in franchising continued to get even bigger: “Based on 2019 systemwide sales, franchising’s strongest brands gained strength, emerging hot brands kept bringing the heat and brands on the decline continued to slow. Aside from a few surprises, the momentum of franchising continued on the same upward trajectory seen in the last few years. “In all, the top-ranking 200 brands grew sales by 4.5 percent . . . . That represents a slight acceleration from last year, when the top 200 grew sales by 4.2 percent. . . . The top 10 brands grew even faster, expanding sales by 5.2 percent to add $16.2 billion, just over half of the overall sales growth for the first 200 on the list.” Big Names Continued to Dominate Franchising in 2019 While more companies turn to franchising every year, the Franchise Times’ data show that the big […]

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A recent article from the International Franchise Association (IFA) sheds light on the significant impact that the COVID-19 crisis has had on the franchise industry over the past six months. The article, which relies on a report prepared by FRANdata, concludes by quoting the organization’s President and CEO as stating that, “COVID-19 has caused a staggering amount of business closures and layoffs across franchise businesses. . . . Additional broad-based and long-term Congressional action is desperately needed to stave off additional closures and layoffs, particularly for the hardest-hit businesses.” The COVID-19 Crisis’s Impact on the Franchise Industry The IFA’s article reports that in the first six months of the COVID-19 crisis, “[m]ore than 1.4 million franchise jobs [have been] lost, and more than 32,000 franchise businesses have closed.” This includes nearly 11,000 franchises that have closed permanently. Worryingly, the IFA projects that another 36,000 franchised businesses will close in the next six months if nothing is done to curb the economic impacts of the pandemic. Overall, FRANdata predicts that one in 20 small businesses will close permanently over the next six months if the current economic trends continue. Additional notable statistics from the FRANdata report include: As of the end of August, just 26 percent of franchises have resumed their normal operations or faced only minimal effects from the COVID-19 pandemic. On average, franchisees have experienced a 19.3 percent decline in revenue during the COVID-19 pandemic. Of the 1.4 million employees in the franchise industry who have lost their jobs, […]

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LITIGATION STRATEGIES FOR ANTITRUST AND FRANCHISE LITIGATION Even when you have a very strong case against a business opponent, you will face difficulty in achieving a satisfactory resolution without an effective and efficient litigation strategy. Your job is to find an expert litigator who can provide you with an accurate assessment of your case. As noted elsewhere on this website, not all lawyers are created equal. Not every lawyer is an expert, and not every lawyer approaches the practice of law from an intellectual perspective. Further, not every lawyer is a litigator; and, not every litigator focuses his or her practice in complex litigation in federal courts around the country. Moreover, not every case is amenable to the same type of strategy. A successful litigation strategy must be predictive, reactive and malleable in the face of constantly changing facts, conditions and events. Legal tactics that are used to further mediocre strategies are not likely to be effective. Tactics that masquerade as strategy are doomed from the start. Most important, superior legal strategies will be capable of causing changes to the future litigation battlefield terrain. A superior litigation strategist will have the self-confidence to believe that he or she can influence and control future events. Last, superior litigation strategists must possess well-developed predictive and reactive capabilities. It is not always easy to find an attorney who can provide you with a superior strategy for your litigation issue. Indeed, it is impossible to do so without affiliating yourself with an attorney who […]

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The Right Lawyer Produces The Higher Quality Franchise Review  Unfortunately, the overwhelming majority of lawyers providing franchise agreement or FDD reviews produce a written memorandum for the client allegedly ‘summarizing’ the 300+ pages of the FDD, the franchise agreement or both. This is in almost all cases a waste of time, money and effort. In almost all cases, such lawyer memos are the result of a young associate’s or paralegal’s ‘filling in the blanks’ on a ‘form memo’ already on the lawyer’s hard drive. A more complete and highly accurate ‘summary’ of the terms in the franchise agreement is already incorporated in the FDD. Should a dispute between you and the franchisor later arise, the Court will not be interested in what your lawyer’s ‘summary memo’ told you about the terms of the franchise agreement; instead, the Court will look to the franchise agreement (and infrequently to the FDD). From a common sense point of view, the provision by your lawyer of another 15 page summary memorandum, on top of a 300+ page FDD and a 60+ page Franchise Agreement is relatively useless. Then why do lawyers do this? Very simply it is many times much cheaper and quicker for a lawyer to have his or her associate or paralegal ‘fill in the blanks’ on a form memo instead of personally doing a full and complete evaluation of each of the provisions of the franchise agreement. In addition, many lawyers who practice on behalf of both franchisors and franchisees do […]

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With the novel coronavirus pandemic affecting businesses across the United States in unprecedented ways, franchisors’ responses have largely fallen into two categories: There are franchisors that have stepped up to help their franchisees survive, and there are those that have chosen to aggressively enforce franchisees’ standard contractual obligations—even knowing that their inability to meet their financial obligations is a direct result of the COVID-19 crisis. Franchisors Need to Support Their Franchisees During the Novel Coronavirus Pandemic In a recent blog article, the International Franchise Association (IFA) writes that it is now more important than ever for franchisors to support their franchisees. As the author, Lauren Moorman, writes: “[M]any of the most vulnerable franchise systems will be looking to mitigate those losses by scaling back spending and imposing new austerity measures for franchisees. “This is a mistake. “While budget-tightening will be unavoidable for most franchise systems, franchisors should be careful not to create new burdens or restrictions on franchisees. . . . Instead, franchisors in every segment should focus on fortifying their front lines, ensuring that franchisees have everything they need to stay afloat now and recover quickly later . . . .” In order to help their franchisees weather the storm and ensure that their brands remain as strong as possible, the article recommends that franchisors take several steps during the COVID-19 crisis. Some of these steps include: Listening to Franchisees’ Concerns – Franchisees are on the front lines; and, while franchisors are feeling the effects of the COVID-19 crisis […]

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As discussed in a recent article published by Nation’s Restaurant News (NLN), some franchisors have begun offering financial relief packages to their franchisees during the COVID-19 crisis. According to NLN, major restaurant franchisors including Yum Brands (KFC, Pizza Hut and Taco Bell), Subway, McDonald’s, Chick-fil-A and Qdoba are offering relief ranging from, “deferring all 2020 capital obligations for remodels and new unit development through the end of this year,” to deferral of royalty and rent payment obligations. These relief packages come as these (and other) franchisors are requiring franchisors to severely limit their operations in order to help combat the spread of the novel coronavirus. In many franchise systems, franchisees have the option to implement social distancing and other safety protocols consistent with local practices as well. Regardless of the impetus, many franchisees are struggling as a result of the economic impacts of COVID-19, and this makes financial relief packages an attractive option for franchisees to whom they are available. Do Franchisor Relief Packages Come with Strings Attached? Before accepting financial relief packages from their franchisors, however, franchisees need to make sure that the relief being offered does not come with strings attached. Or, if it does come with strings attached, then franchisees need to know what these strings are, and they need to decide if the associated costs and risks are worth it. If royalty payments are being deferred, are they being deferred with interest? Will past-due royalties eventually be due in a lump sum; and, if so, when? […]

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While buying a franchise is generally considered to be less risky than starting an independent business in the same industry with the same start-up costs, many franchisees still fail. There are several reasons why, and these reasons are not necessarily consistent across industries or franchise systems, or even within individual franchisors’ ranks. The risk of failure is one of the primary reasons why all prospective franchisees need to work with an experienced franchise attorney before buying, and it is why active franchisees should engage legal counsel promptly if they run into issues or have a dispute with their franchisor. While the question, “Why do franchisees fail?” does not have one single straightforward answer, there are a number of possible reasons for franchisee failure. Some of these reasons include: 1. The Franchise System Isn’t Sound Like anything else, some franchise systems are simply better than others. If a franchise system isn’t sound – if the brand doesn’t resonate with customers, if the products or services are subpar, or if the marketing plan just doesn’t work – then franchisees are going to struggle. If Item 20 of the Franchise Disclosure Document (FDD) shows a high volume of franchisee turnover (including a large number of franchisees leaving the system “for other reasons”), this may be a sign that there issues with the system as a whole. 2. The Franchisor Doesn’t Provide Adequate Training or Support Lack of training can be an issue in systems where (i) there are a significant number of complex […]

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When researching franchise opportunities online, you will come across several lists with names like, “Top Franchises Under $30,000” and “Cheap Franchises Under $10k”. While these make for good headlines, does it really make sense to shop for a franchise by price point? Here, national franchise lawyer Jeffrey M. Goldstein shares his thoughts. 1. What is the “Price Point”? When talking about franchise price points, it is important to ask: What “price point” are we talking about? Generally speaking, there are three options: The Initial Investment Fee disclosed in Item 5 of the Franchise Disclosure Document (FDD) The total estimated initial investment disclosed in Item 7 of the FDD The total cost of ownership over the lifetime of the franchise Most online lists focus only on the Initial Investment Fee. There are a couple of reasons why. First, this number is easy to find, and this makes it easy to compile a list. Second, this is the lowest number that can reasonably be characterized as the “price point” for a franchise. So, while this number ultimately only reflects a small fraction of the cost of franchise ownership, it is a good choice for marketers seeking to get clicks from prospective franchisees. 2. Price Point is Only One of Several Factors to Be Considered While the amount of money you have available to invest in a franchise is certainly a factor to be considered, it is not the only factor that should drive your franchise buying decision. From brand recognition and franchisor […]

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Buying a franchise is not a simple process. There are several steps involved, and you need to do everything you can to make sure you feel as confident as possible that you will be able to succeed as a franchisee. Too often, prospective franchisees rush the buying process—either because they are excited about the franchise opportunity, or because the franchisor’s sales reps encourage them to sign quickly without doing their full due diligence. When buying a franchise, there is no substitute for hiring an experienced franchise attorney to guide you through the process. With that said, as a prospective franchisee, there are several steps you can take on your own, and it is important to be aware of the overall timeline of the franchise buying process. Here is a checklist you can follow: 10 Steps in the Franchise Buying Process 1. Compare Franchise Opportunities Before settling on one particular franchise opportunity to pursue, it is important to consider the competition. How are the franchised brands similar? How are they different? 2. Choose a Franchise Opportunity to Pursue Next, it is time to choose the franchise opportunity you are going to target. From this point forward, you will be devoting a lot of time and effort to your chosen opportunity, so you will want to choose wisely. 3. Meet with the Franchisor Once you choose a franchise opportunity to target, it is time to meet with the franchisor. Schedule an appointment via videoconference or in person, and be prepared with a […]

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