Franchise Articles

It finally happened. You’ve decided that enough is enough, and you are ready for the nightmare of franchise ownership to be over. Your hopes have been dashed. Your expectations have gone unfulfilled, and your franchisor has gone silent as you have struggled to keep up with your monthly expenses. Unfortunately, this is an all-too-common reality for franchisees in all types of franchise system. Despite the industry-published statistics on franchisee success and the promises your franchisor made before you signed your franchise agreement, building a profitable franchise is not easy. A significant percentage of franchisees close before the initial terms of their franchise agreements expire, and these “failures” are often due to the fact that franchisors fail to uphold their end of the bargain. So, you are ready to get out. What do you need to know? What You Need to Know about Terminating Your Franchise 1. Franchise Agreements are Long-Term, Legally-Binding Contracts For most fed-up franchisees, the initial prognosis is not good. A franchise agreement’s initial term is both a minimum and a maximum, which means that (i) you are bound until the agreement expires, and (ii) when your agreement expires, it is largely up to your franchisor whether you get to renew. How many months (or years) are left in your franchise agreement’s term? If you are close, you may be able to find a way to wait it out; or, you may be able to use this as leverage in termination negotiations with your franchisor. But, until you […]

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When buying a franchise, you need to make a number of important decisions. One of these decisions is: Should you buy into a well-established franchise system; or, should you get in on the ground floor of an up-and-coming franchised brand? Both options offer potential benefits. While buying into a well-known franchise can offer instant brand recognition, buying into a new franchise system can reduce the risk of territorial encroachment and intra-brand competition.  Established franchisors offer experience, while new franchisors may offer fresh ideas and a more-contemporary approach to doing business. Should You Buy into an Up-and-Coming Franchise? But, both options come with potential drawbacks as well. Here are five risks associated with choosing a new franchise system: 1. Lack of Franchising Experience Franchising is a unique business model, and not everyone who succeeds in building a retail brand will be successful operating as a franchisor. When you are relying on a franchisor for guidance and operational support, it can be challenging to work with executives and personnel who are not experienced in managing a franchise system. 2. Lack of Brand Recognition In most cases, one of the primary benefits of buying a franchise is to benefit from the franchisor’s brand recognition. Instead of promoting a new brand that no one has ever heard of, you get to benefit instantly from the goodwill that the franchisor has cultivated over years of consistent marketing and providing quality service to its clients or customers. But, if you will be the first franchisee in […]

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“Green” franchises became mainstream a handful of years ago, and their popularly has held steady ever since. From commercial cleaning and pressure washing franchises to franchises that install synthetic turf systems and home efficiency technologies, if you want to start a business that is eco-friendly, there is probably a franchise opportunity that will appeal to you. But, as with all franchise opportunities, when purchasing a “green” franchise, it is important to perform your due diligence. This means talking to the franchisor, talking to current and former franchisees, and hiring a franchise lawyer to review the Franchise Disclosure Document (FDD) and franchise agreement. In addition to the legal concerns that apply to franchise opportunities generally, here are some “green”-specific considerations to keep in mind: 1. Substantiation of “Green” Advertising Claims When “green” businesses started popping up with increasing frequency, so did references to the concept of “greenwashing.” This term refers to businesses spinning, misrepresenting, or selectively publishing information in order to make themselves appear “greener” than they really were. Significant cases of greenwashing can constitute false advertising, which is a form of consumer fraud As a franchisee, you will likely use advertising materials that have been prepared by your franchisor. But, this does not necessarily mean that you are immune from liability for false advertising. Your franchisor should be able to readily substantiate its claims of environmental friendliness; and, if it can’t, your best option may be to consider a different franchise opportunity. 2. Mandatory Suppliers For product-based franchises, the commitment […]

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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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“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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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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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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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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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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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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