There are lots of legal aspects to franchise ownership. As a franchisee, you don’t need to be an expert in franchise law, but you do need to make sure you are relying on the advice of an experienced franchise lawyer. Without an in-depth understanding of the FTC Franchise Rule, your state’s franchise laws (if any), the terms of your franchise agreement and the case law surrounding franchising, you can easily overlook issues that present major risks for your franchise.
5 Examples of Important Legal Considerations for Prospective Franchisees
What are these risks? Here are five examples of the numerous legal issues that should inform prospective franchisees’ buying decisions:
1. The Franchisor’s (and Its Executives’) Legal History
Items 2, 3 and 4 of the Franchise Disclosure Document (FDD) should contain any relevant information about the franchisor’s (and its executives’) legal history. Does the franchisor have a history of litigating with its franchisees? Has it filed for bankruptcy in the past? Have any of its executives ever been charged with fraud? As a prospective franchisee, the answers to these questions should help inform your buying decision.
2. Territorial Rights and Restrictions
Different franchisors grant different types of territorial rights. Some don’t grant any territorial rights at all but instead impose geographic restrictions on where franchisees can operate and advertise. FDDs don’t always make this clear; and, as a result, it is important for prospective franchisees to carefully review (or hire a franchise lawyer to carefully review) the relevant provisions of their franchise agreement.
3. Operational Rules, Requirements and Restrictions
Under the terms of your franchise agreement, you will be bound to comply with the terms of the franchisor’s Operations Manual, “as it is updated from time to time.” This means that you cannot predict with absolute certainty what you will be required to do as a franchisee. But, you can (and should) examine the operational rules, requirements and restrictions that are in place currently—including those regarding:
- Approved or designated suppliers
- Brand standards and trade dress
- Mandatory advertising expenditures
- Mandatory purchases
- Minimum royalty obligations
4. Deadlines, Due Dates and Grace Periods
Is there a deadline for opening your franchise? When will your royalty and advertising fund contributions be due? Is there a grace period if your franchise is struggling? All of these issues have the potential to have a direct impact on your success (and liability) as a franchisee.
5. Defaults, Termination, Post-Termination and Dispute Resolution
Finally, as a franchisee, you need to know what defaults can lead to the termination of your franchise rights. You also need to know what obligations you will have post-termination (i.e., an obligation not to compete or to pay “lost future royalties”), and you need to know what options you will have in the event of a dispute with your franchisor.
Request a Free Consultation with Franchise Lawyer Jeffrey M. Goldstein
Franchise lawyer Jeffrey M. Goldstein has more than 30 years of experience helping prospective franchisees make informed buying decisions. To discuss your franchise opportunity with Mr. Goldstein in confidence, call 202-293-3947 or request a free initial consultation online today.
