We write a lot about franchising on our blog. Over the years, we’ve covered topics ranging from what you need to know before buying a franchise to what you can expect during a dispute with your franchisor. But there’s one question that we’ve never answered directly.
What is a franchise?
If you’re thinking about buying a franchise or if you already own a franchise, the answer is more important than you might think. The nature of the franchise relationship has important implications for your legal rights—as well as your (and your franchisor’s) legal obligations. As a franchise law firm that exclusively represents franchisees, we’ve represented lots of prospective and active franchisees over the years, and we’ve helped numerous clients leverage the protections they have available under the franchise model.
Understanding What it Means to Be a Franchisee
So, what is a franchise? Legally speaking, a franchise is a contractual relationship between two parties where one party (the franchisor) gives the other party (the franchisee) the right to use its trademarks, trade dress and business systems. By definition, a franchise must also involve payment of a fee (the royalty) from the franchisee to the franchisor.
The contract that establishes (and governs) the franchise relationship is the franchise agreement. Franchisors must include a copy of their standard form franchise agreement as an exhibit to their Franchise Disclosure Document (FDD); and, since these agreements are written by franchisors’ lawyers, they are usually heavily one-sided. As a result, when buying a franchise, it is crucial to engage a franchise law firm to review and negotiate the franchise agreement on your behalf. Most good franchisors will be willing to consider reasonable requests for modifications—because they know that their agreements are not franchisee-friendly as standard.
In addition to the franchise agreement, the franchise relationship is also governed by franchise-specific laws in some states. These state franchise laws vary—and not all states have them—so this is something you should discuss with your franchise law firm as well. If a state franchise law protects you, these statutory protections could prove crucial in the event of a dispute with your franchisor.
Franchisees Are Independent Business Owners
When describing the franchise model, a distinction is often drawn between franchisees and “independent business owners.” But franchisees are independent business owners as well. As a franchisee, you will own your own business entity (most franchisees establish a corporation or limited liability company (LLC), and you will be responsible for your own success. You will use the franchisor’s branding and systems—and you may receive some operational support from the franchisor—but it will ultimately be up to you to make your business profitable.
While franchisors do have some responsibilities, these responsibilities are usually quite limited. Franchisors use their franchise agreements to protect themselves, and one way they do this is by making sure their obligations are as limited as possible. Even when a state franchise law applies, as a practical matter, the protections the law affords generally only come into play when a franchisee decides to take action to enforce its legal rights.
Buying a Franchise: Is It Worth It?
Given the limitations of the franchise model, is buying a franchise worth it? For many people, the answer is a clear “Yes.” The franchise industry is booming—and the total number of franchised outlets in the United States has increased by more than 13 percent over the past five years.
But, is it worth it for you? This is a question that only you can answer. You need to make an informed decision about the specific franchise opportunity you choose to pursue, and you need to have a clear understanding of all of the risks involved. Here are some key considerations:
- Different Franchisors Offer Different Terms and Conditions – While nearly all franchise agreements are one-sided, some are even more one-sided than others. Whether you are thinking about buying a franchise or facing a dispute with your franchisor, it is important to make sure you have a clear understanding of the terms of your contract.
- Some Franchisors Are Better Than Others – In addition to offering different terms and conditions, some franchisors are just better than others. They provide more support to their franchisees, and they act in good faith when other franchisors would not. While many franchisees don’t learn this until it’s too late, talking to current and former franchisees is a good way to find out what you can expect when conducting your due diligence.
- While Franchisors Provide Support, Franchisees Are Responsible for Their Own Success – We’ve said it before and we’ll say it again: As a franchisee, you are responsible for your own success. No matter how much support your franchisor provides, you will still need to put in the time and effort to build a successful business.
- Franchisor-Franchisee Disputes Are Not Uncommon – In addition to helping prospective franchisees make informed buying decisions, a significant portion of our practice involves representing active franchisees in disputes with their franchisors. These disputes are not uncommon, and they can involve issues arising under the franchise agreement, state franchise laws and the various other laws that apply. The possibility of a dispute is a factor that all prospective franchisees should consider, and while no one wants to go to mediation, arbitration or litigation, sometimes this is the best option for protecting franchisees’ legal rights.
- Many Franchisees Do Succeed – While some franchisees fail, and while some end up in legal disputes with their franchisors, many do find success under the franchise model. If you do your research, develop a sound business plan, secure the necessary financing and get comfortable with the risks involved, then you may find success as an independent franchise owner.
Contact Our Franchise Law Firm for More Information
As a franchise law firm that exclusively represents franchisees, we have extensive experience advising prospective franchisees during the buying process and representing active franchisees in disputes with their franchisors. If you have questions about buying a franchise or your legal rights as an active franchisee, we invite you to call 202-293-3947 or contact us online for a free and confidential consultation.