Franchise Articles

In a recent article, we discussed some of the practicalities of purchasing a low-cost franchise. We looked at some “cheap” franchise opportunities that have wide initial investment ranges, and noted that most franchisees should generally assume that they will not be at the bottom of the range. We also examined some of the ongoing costs that can substantially increase the total investment in a franchise, and we provided links to some of our most-popular resources for evaluating franchise opportunities. What Do You Need to Know Before You Buy a Low-Cost Franchise? In addition to these financial factors, there are a number of other special considerations involved in buying a low-cost franchise as well. Some of these factors include: 1. Brand Value When you buy a franchise, what are you really paying for? The legal definition of a franchise consists of three main elements: (i) association with a trademark and (ii) access to a marketing plan in exchange for (iii) payment of a fee. For many franchisees the association with a trademark (or “brand name”) is one of the most valuable – if not the most valuable – aspects of franchise ownership. If a franchisor offers a low franchise fee, one of the key questions you need to ask is, “Why?” Could it be because the franchisor’s brand value is minimal? If so, then you need to seriously consider if even the low franchise fee is justified in terms of the brand recognition you will enjoy as a franchisee. 2. Business […]

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As a franchisee, many aspects of the franchise relationship can seem unfair. The longer you own your franchise, you are likely to realize how truly one-sided the relationship really is, and there is a good chance that you will grow increasingly frustrated with the power that your franchisor wields over your business. But, from a legal perspective, when are a franchisor’s practices considered “unfair”? Unfair franchise practices provide franchisees with a legal cause of action against their franchisors. However, the legal definition of an “unfair franchise practice” is limited, and not every complaint will justify arbitration or litigation. Examples of unfair franchise practices include: 1. Supplier and Sourcing Restrictions Franchisors are well within their rights to designate suppliers for products and services and impose other sourcing restrictions on their franchisees. After all, uniformity is one of the hallmarks of franchising. However, what franchisors cannot do is impose undue restrictions that harm franchisees to the franchisor’s financial gain. For example, if similar-quality products are available from multiple suppliers, it may be an unfair franchise practice for the franchisor to mandate that franchisees pay more to a supplier that offers a rebate to the franchisor. 2. Price Control Under state and federal antitrust laws, franchisors are prohibited from using their “market power” to dictate prices in individual markets. While proving that a franchisor has sufficient market power to control local prices can be a challenge, if your franchise is struggling because you cannot charge a reasonable price for your goods or services, […]

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When you buy a franchise, it is easy to focus on short-term considerations: How much is the initial investment? How long will it take for you to open for business? How soon can you reasonably expect to turn a profit? While these are all undoubtedly important factors, there are several long-term factors you need to consider as well. Whether you intend to operate your franchise for as long as possible or you are hoping to build a business you can sell, there are several important provisions of the franchise agreement that should weigh into your buying decision. Some of these factors include: 1. Renewal Rights and Conditions Franchise agreements typically include numerous strict and franchisor-friendly conditions on the franchisee’s right to renew. When reviewing the franchise agreement’s renewal provisions, some of the key factors to assess include: How much is the renewal fee? Does the franchise agreement provide for unlimited renewals? Do the renewal conditions essentially give the franchisor subjective control over your right to renew? 2. Transfer Rights and conditions Similar considerations apply to the franchise agreement’s transfer provisions. Most franchise agreements require payment of a transfer fee (which can often be negotiated between the franchisee and the buyer) and impose various other conditions on the franchisee’s right to transfer. Many franchisors will also demand a right of first refusal, which can be a turn-off to prospective buyers. 3. Grounds for Termination Ideally, you will find success as a franchisee, and you will never have to think about the […]

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When choosing between potential franchise opportunities, there are numerous different factors to consider. Among these factors is the question of where you want to run your business. Do you want to run your business out of your home? Are you interested in a mobile franchise? Or, do you want to lease a retail location where you and your employees will interact with customers? 4 Factors to Consider Regarding Franchise Location While some franchises offer options, in most cases, whether you operate from home, from a vehicle or from a storefront location will be dictated by the franchise you choose. In any case, when deciding which option is most fitting for you, here are some important factors to consider: 1. Self-Direction and Discipline Some people are extremely efficient working from home. They have an office that is dedicated to their franchised business, and they have no problem sitting down and working when work needs to be done. Other people find working from home too distracting, with everything from laundry to video games getting in the way of productivity. Operating a successful franchise requires commitment, and if you cannot commit yourself to working from home, then a home-based franchise may not be for you. 2. Storage and Facilities When leasing retail space, meeting your storage and other facility-related needs is a matter of choosing a suitable location and negotiating the terms of your lease. When operating from home or operating a mobile franchise, there can be more restrictions involved. Will you have […]

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Before you buy a franchise, the franchisor is legally required to provide you with a copy of its Franchise Disclosure Document (FDD) and franchise agreement. Federal regulations require franchisors to deliver these documents at least 14 calendar days prior to entering into a franchise relationship. This “cooling off” period is designed to give prospective franchisees sufficient time to weight their options without being pressured by the franchisor, as well as to review the FDD and franchise agreement in detail. When reviewing the FDD, most prospective franchisees hit the highlights: the Initial Franchise Fee, the royalty rate, the estimated initial investment and maybe the description of the protected territory. Few digest the FDD in its entirety, and fewer still take the time to wade through the dense legalese of the franchise agreement. 5 Key Issues to Review in the FDD and Franchise Agreement But, when buying a franchise, you need to gather as much information as possible, and you need to make sure you have a clear understanding of your legal rights and responsibilities. You also need to make an informed decision about negotiating certain provisions of the franchise agreement. If you overlook these provisions of the FDD and franchise agreement, among others, you may find yourself facing unexpected (and unhappy) surprises down the line: Franchisor Personnel Experience – Do the franchisor’s key personnel have experience running the type of business you will operate as a franchisee? Do they also have significant experience working for franchisors? Both of these are important, […]

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Despite the legal and financial risks involved, buying a franchise can be a profitable investment. With thorough research and planning, consistent effort, and some good luck, it is certainly possible to succeed as a franchisee. While we typically focus on the risks involved with franchise ownership on our blog (we are franchise lawyers, after all), the potential benefits of owning a franchise deserve acknowledgement as well. Under the right circumstances, here are seven potential benefits of franchise ownership: 1. Recognizable Brand Gaining access to a recognizable brand is one of the primary reasons why people choose to buy a franchise instead of starting an independent business. Opening your business under a name that is already well-known and respected can jumpstart your path to profitability. 2. Tested Business System Buying a franchise can afford access to a business system that has been tested and proven not just by the franchisor, but potentially by hundreds or thousands of franchisees across the country and around the world. Instead of spending the time (and money) to figure out what works and what doesn’t, you can feel confident knowing that the franchisor has already done this for you. 3. Franchisor Support A franchisor is only as successful as its franchisees. As a result, franchisors have a vested interest in providing their franchisees with as much support as possible. From launching your grand opening advertising campaign to overcoming unexpected hurdles months or years down the line, a good franchisor will be there for you when you […]

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Earlier this year, Entrepreneur.com published a slideshow titled, “5 Affordable Franchises You Can Start for Less Than $10,000.” So, can you really buy a franchise for four figures? If so, is it a good idea? How Much Does It Really Cost to Buy a Franchise? It appears that the article’s figures are based on the franchisors’ initial investment estimates in Item 7 of the Franchise Disclosure Document (FDD). For example, the first slide shows an initial investment of $3,245 to $21,850 for the Dream Vacations franchise. So, right away, you can see that while it may be possible to start a franchise for less than $10,000, it is also possible to spend twice that amount, if not more. As we often tell prospective franchisees, when reviewing the estimates in Item 7, it is generally best to assume that you will not be at the bottom of the estimated range. The second slide shows an even greater range of potential startup costs. For the Buildingstars commercial cleaning franchise, Entrenrepeur.com quotes the estimated initial investment at $2,245 to $53,200. In fact, among the five franchises you can start “for less than $10,000,” the lowest high-end initial investment is $17,000. Even so, $17,000 is still a fairly modest investment for purchasing a franchise (on the high end, the initial investments for hotel and restaurant franchises can easily range into the millions of dollars). So, is buying a “cheap” franchise a good idea, or are there hidden risks involved? Considerations for Buying a “Cheap” […]

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When buying a franchise, it is important to gather as much information as possible. While this primarily means gathering information about your chosen franchise opportunity, gathering information about competing franchise opportunities can prove valuable as well. But, most franchisors will only give copies of their Franchise Disclosure Documents (FDDs) and franchise agreements to serious candidates, and you cannot necessarily rely on details posted by third-party sites online (the information on these sites is often outdated). So, how can you compare franchise opportunities? 5 Sources of Information for Comparing Franchise Opportunities 1. Franchise Trade Shows and Expos Franchise trade shows and expos provide opportunities for prospective franchisees to meet with franchisors’ representatives face-to-face in a relatively low-pressure environment. There are plenty of these events across the United States each year, with the International Franchise Expo easily being the largest and most well-known. If you are serious about buying a franchise, visiting a trade show or expo may be worth your time, as you will be able to learn more about a multitude of different franchise opportunities. 2. Franchisors’ Websites While franchisors need to be careful about disclosing too much information on their websites, you can often find basic data about initial franchise fees, royalties, and system standards online. In many cases, this information will be presented in a table comparing the franchisor to its competitors. Of course, some franchisors’ websites are better than others, and any comparison tables you find are likely to be heavily skewed in favor of the franchisor […]

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Jeffrey M. Goldstein, founder of the Goldstein Law Firm, has been practicing franchise law for more than 30 years. Exclusively representing franchisees and dealers, he has successfully represented clients across the country in franchise agreement negotiations, arbitration, litigation and other franchise-related legal matters. Here, he sits down for a Q&A session to discuss some of the biggest legal risks facing new and existing franchisees: Q: What are some of the most-important legal factors to consider when buying or operating a franchise? In addition to facing the same legal risks as all business owners, franchisees face a number of additional risks as well. These risks relate predominantly to the rights granted to the franchisor under the franchise agreement. From operating standards to franchise transfer and renewal, franchisors have a say in virtually all aspects of franchisees’ businesses, and they will not hesitate to intervene (or even terminate a franchisee) when they believe that doing so is in the best interests of the franchise system as a whole. Q: How can prospective franchisees protect themselves before signing a franchise agreement? As a prospective franchisee, there are two primary ways to protect yourself before you sign a franchise agreement: (i) conducting thorough due diligence, and (ii) negotiating the terms of your franchise. By gathering as much information as you can from as many sources as possible, you can gain confidence in your decision to move forward (or to pursue a different path). Once you decide to pursue a particular franchise opportunity, then negotiating […]

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Whether you love cars or you are looking for a recession-resistant franchise with the potential for repeat business and a high sales volume, buying an automotive franchise presents both opportunities and risks. From seeing your customers every 3,000 miles to facing lawsuits when your customers’ cars break down and cause accidents, there are numerous factors that can increase both profit potential and liability exposure for automotive franchise owners. Here are four important legal considerations for purchasing an automotive franchise: 1. Liability for Employees’ Mistakes For automotive service franchises, such as oil change centers and repair shops, hiring well-trained and highly-skilled employees is of critical importance. When it comes to working on cars, trucks and SUVs, even minor mistakes can have drastic consequences. If one of your employees under-torques a drain plug or fails to properly bleed a customer’s brakes and the customer gets injured (or injures someone else) in an accident as a result, then your franchise could be in the line of fire. In addition to thoroughly vetting service employees, purchasing adequate insurance coverage can be critical to protecting an automotive franchise from business-threatening liability. Insurance policies should be crafted to meet the unique needs of the franchise, including both coverage limits and covered perils. 2. “Chain of Distribution” for Mandatory Products and Suppliers As a retail business, your automotive franchise will be in the “chain of distribution” for purposes of the law of product liability. This means that, if you sell a defective product that ends up causing […]

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