Franchise Articles

If you are thinking about selling your franchise, along with assessing your ability to satisfy the conditions for transfer in your franchise agreement, you will also need to determine the value of your business. There are a number of different methods for valuing a franchise – and ultimately your franchise will be worth what someone else is willing to pay – and making an informed decision before putting your franchise on the market will be important to making your exit from the franchise system. Factors for Valuing an Individual Franchised Outlet Valuing a franchise involves considerations that are both similar to and unique from valuing a fully-independent business. For example, while you need to determine the depreciated value of your company’s assets, in the context of a franchise, certain assets will be excluded from the business’s valuation. Most notably, while a fully-independent business will own trademarks and other intangible assets (such as copyrighted materials, customer lists and other proprietary information) that can significantly increase its valuation, in the franchise relationship, these assets belong to the franchisor. On the other hand, in some circumstances, the franchise relationship can add value itself, and your franchise agreement could be an asset that adds to your overall valuation. Some other factors involved in valuing a franchise for purposes of a potential transfer include: 1. Physical Assets Any physical assets your franchise owns will be relevant to determining its valuation. This includes everything from back office computers and furniture to point-of-sale (POS) systems and inventory. […]

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Buying a franchise is a complex investment. If you are like most prospective franchisees, you are preparing to invest a substantial portion of your life savings (and perhaps take out a small business loan), and you will rely on your franchise’s revenue to cover your business and personal expenses on a month-to-month basis. With these considerations in mind, when buying a franchise, there are some key mistakes you need to avoid. Here is a non-exhaustive list of what not to do if you are thinking about signing a franchise agreement: Mistake #1: Relying Solely on the Franchisor for Information When deciding whether to move forward with a franchise purchase, you need to make your decision based upon as much information as possible. While the franchisor’s marketing collateral and Franchise Disclosure Document (FDD) are fine places to start, you need to dig much, much deeper. A comprehensive due diligence analysis will involve talking to current and former franchisees, reviewing previous versions of the FDD, comparing competing franchise opportunities, and much more. Mistake #2: Skimming the Franchise Disclosure Document (FDD) When you receive a copy of the franchisor’s FDD, you need to read it. All of it. Even if there are sections you do not understand, reading the FDD carefully and taking notes will allow you to ask the questions necessary in order to make an informed decision. Mistake #3: Not Negotiating the Franchise Agreement No matter what anyone tells you, franchise agreements are negotiable. This is a good thing, because the […]

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Buying a franchise and starting an independent business from scratch are two very different propositions. While franchisors and many online “franchise guides” tout the benefits of franchise ownership, there are a number of downsides as well. Here is a list of eight ways – good and bad – that owning a franchise is different from starting an independent business: The Good: 1. A Recognizable Brand For most people, one of the primary motivators for buying a franchise is immediate access to a recognizable brand. It can take several years and many thousands of dollars to build a brand that is on par with what some franchisors can offer, and immediate brand recognition can allow you to hit the ground running. 2. A Tested Business System The second hallmark of a strong franchise is a tested business system. When you buy a franchise, not only are you buying brand recognition, but you are also buying the ability to take advantage of a business system that has proven successful in the past. 3. Training and Operational Support Access to training and support can be benefits of buying a franchise as well. If your franchise will be your first business venture, having access to these types of resources can add significant value to a franchise acquisition. 4. A Network of Like-Minded Franchisees As a franchisee, you will likely have access to other franchisees in the franchisor’s system. You can share ideas and gripes, get your questions answered, and benefit from other franchisees’ collective […]

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As a prospective franchisee, one of the keys to success is making as informed a decision as possible about your choice of franchise opportunity. While all viable franchise systems have successful franchisees, in order for you to have a reasonable chance of success in your chosen system, you need to go in eyes wide open and with a clear understanding of the legal and financial risks involved. With this in mind, before you buy, you need to ask questions – lots of questions. Do not take anything the franchisor’s representatives say for granted, and make sure you are relying on multiple sources of information. Questions to Ask the Franchisor Some key questions to ask the franchisor’s sales representatives and operational managers include: What sets your franchise apart from the competing franchised brands? How has the franchise system changed and grown over the past five years? How much ongoing support can I expect once I open for business? Who will be my point of contact? How are you making use of franchisees’ advertising fund contributions? Are there any significant changes or developments on the horizon? Questions to Ask Current Franchisees In speaking with current franchisees within the franchise system, some of the questions you may want to have answered include: Would you buy the same franchise again if you could go back and do it over? Are you seeing any direct benefits from your marketing fund contribution? How accessible are the franchisor’s support staff? Do you frequently have issues with system […]

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The Washington Supreme Court has recently ruled Franchisors cannot exceed ‘fair and reasonable prices’ in selling products and services to their franchisees. Specifically, the Court held that under that state’s Franchise Relationship Act that it is an unfair or deceptive act or practice for any person to “sell, rent, or offer to sell to a franchisee any product or service for more than a fair and reasonable price.”  The Washington Supreme Court proceeded to define prolific components of a definition of “fair and reasonable price” for such products. The Washington Court explained: The plain language and the legislative history of the FIPA make clear that a broad understanding of the market and market forces must inform a fact finder determining whether prices are fair and reasonable under the FIPA. A fact finder must take into consideration market forces writ broadly. This includes what the district court relied on—the price at which the franchisor acquired the products or services—but reaches beyond. The prices of competitor franchisors should be taken into account, including whether the prices of all franchisors are the same. So, too, should the statements of profit margin made by the franchisor. Other relevant factors include the franchisor’s charges to other franchisees for the same or similar products or services; what other similarly situated franchisors charge similarly situated franchisees for the same or similar products or services; business and industry practices; the price the franchisor pays for the products or services; and the price at which the franchisee could obtain […]

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Antitrust is among the most-confusing areas of the law, even for attorneys. But, as a franchisee, understanding the antitrust principles that apply to the franchise relationship is important, as franchisor antitrust violations are common, and they can have severe negative ramifications for individual franchisees. So, as a franchisee, when is it time to speak with an antitrust attorney? Here are five of the most-common antitrust violations in franchising: Common Antitrust Violation #1: Unlawful Customer Restrictions Protected and “exclusive” territories are common in franchising; and, while dividing geographic territories amongst franchisees is generally permissible, there are other types of customer restrictions that can violate federal and state antitrust laws. When examining customer restrictions for potential antitrust issues, the franchisor’s intent and the practical effect of a restriction are both important factors. With regard to franchisor intent, if the purpose of a restriction is to limit customers’ options (i.e. by prohibiting franchisees from serving customers outside of their respective territories), then this is more likely to tend toward an antitrust violation. For example, if a franchisor wants to prevent franchisees from competing with one another on price (in order to drive up royalties and marketing fund contributions), this could be an unlawful practice. On the other hand, if a franchisor simply restricts franchisees from actively marketing outside of their respective territories (but does not restrict the customers they can serve), this is an industry-standard practice that generally does not raise antitrust implications. This is a complicated and nuanced area, and franchisees who […]

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Not only does buying a franchise involve a making sizable financial investment, but it also involves entering into a long-term legal relationship that provides very limited opportunities to protect your investment if something goes wrong. As a result, in addition to working with your financial advisor, it is also important to work with an attorney who can help you assess the legal risks involved and, potentially, negotiate more-favorable terms into your franchise agreement. These legal services are commonly referred to as a franchise business review. As with all aspects of buying a franchise, when choosing a lawyer to perform your franchise business review, you need to make an informed decision. A lawyer who doesn’t focus his or her practice on franchise law won’t be able to provide you with the insights you need, although he or she may be able to provide general legal advice about the risks entailed by your franchise agreement. Likewise, a lawyer who primarily represents franchisors will lack the perspective needed to view the issues from your point of view and might even have interests that are in conflict with yours. So, what is the best option? When you need a franchise business review, you need a franchise lawyer who focuses exclusively on representing prospective and current franchisees. What Factors Should You Consider When Choosing a Lawyer for Your Franchise Business Review? While there aren’t many franchise lawyers in this category, there are more than one. So, what factors should you consider when choosing a lawyer […]

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The franchise industry is constantly evolving. Statistics often change dramatically from year to year, with economic conditions heavily influencing the growth, retraction and overall stability of franchise systems in virtually all sectors. Franchisedirect.com recently published an infographic that provides an interesting overview of franchising’s history and some notable statistics on the industry. Here are some of the numbers that stood out to us the most: An Average of 300 Companies Start Franchising Each Year According to Franchisedirect.com, “[a]n average of 300 new brands start franchising each year.” This means that on more days than not there is a new opportunity for prospective franchisees to explore. Franchising saw its first boom in the late 1950s, and approximately 60 years later the industry is – at least by some standards – stronger than ever. There are More than 750,000 Active Franchised Outlets The infographic indicates that there were expected to be more than 750,000 franchised outlets by the end of 2018. It also notes that one in seven businesses is a franchise. Of these franchises, slightly over half (53 percent) are owned by multi-unit franchisees. Just under half of all franchisees own a single outlet. More Than 80 Percent of Franchises are Local or Regional Brands 50 percent of franchises are classified as “local” brands, while 34 percent are classified as “regional” brands. This means that just 16 percent are the national and global brands that most people picture when they hear the word, “franchise.” While this statistic may be surprising to […]

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If you are like most dissatisfied franchisees, you want to get out of the system, and you are prepared to do so by all legal means available. However, you also probably know that your rights under your franchise agreement are limited. In fact, if you have reviewed the “Termination” section of your agreement, you may have noticed that you don’t actually have any termination rights at all (in contrast to your franchisor, which probably has multiple options for forcing you out of the franchise system). Fortunately, an antitrust attorney who is familiar with the franchise relationship may be able to help. What is Antitrust Law? Antitrust law prohibits private parties (i.e. franchisors, vendors and other third parties) from entering into agreements that constitute unreasonable restraints on trade. Antitrust law has its origins in consumer protection, with the Sherman Antitrust Act of 1890 (the “Sherman Act”) outlawing business arrangements (which, at the time, used a specific form of trust) that created monopolies and restricted market competition. The Sherman Act remains relevant today, and various other laws at the state and federal levels prevent anti-competitive conduct and establish other antitrust protections as well. How is Antitrust Law Relevant to Franchisees? So, how is antitrust law relevant to franchisees? In the franchise context, the Sherman Act and other state and federal antitrust laws prohibit franchisors from entering into contracts that either (i) force franchisees to pay more for products and services than market forces would dictate, or (ii) restrict franchisees’ ability to offer […]

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From Instagram to Google Maps, in today’s world, getting found and interacting with customers online are among the most-effective ways to build a successful business. The International Franchise Association (IFA) recently published the results of a poll in which franchisees were asked to list their most-effective channels for generating customer leads, and four of the top six involved digital marketing. Social media came in second (behind “referrals”) at 55.26 percent, followed by search engine optimization (SEO), pay-per-click advertising and content marketing. Radio and television tied for second-to-last (before billboards) at just 2.63 percent. But, as a franchisee, your ability to market online is limited. As with all other aspects of your business, you can only say and do what is permitted by the terms of your franchise agreement and the franchisor’s operations manual. If you build an online presence in a non-compliant manner, your franchisor may force you to make changes (which could confuse your followers), it may force you to transfer your accounts and it may even declare you in default under your franchise agreement. What Can (and Can’t) Franchisees Do Online? So, as a franchisee, how can you market your business online? While individual franchisors’ rules and restrictions vary, some examples of potential restrictions include: 1. Approval of Advertising Materials Traditionally, franchisors have typically required franchisees to obtain pre-approval of any advertising materials they intend to use. But, as a franchisee, you cannot wait days (or weeks) to find out if you have permission to post a photo […]

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