Franchise Law Questions and Answers


Q. What is franchising?
   
A. Franchising is a method of expanding a business by licensing its trademark and business system to a franchisee in exchange for a franchise fee and royalties, and the right to operate a franchise using the business system and trademark of the franchisor. Most importantly, the franchisee must conduct its business operations in accordance with standards and specifications established by the franchisor. Franchisors provide franchisees with pre-opening training, post-opening training, and continuing support.
   
Q. What are the advantages of franchising to the franchisor?
   
A. There are many. Since franchisees pay the costs of opening their own unit, franchising allows the franchisor to expand its business without spending significant dollars per unit. Keeping costs low per unit reduces the franchisor’s risk while increasing the overall return on investment. Franchising generally allows the franchisor to grow its business faster than it would be able to do so otherwise. Additionally, not having to manage each unit on a day-to-day basis allows the franchisor to devote more time to developing its brand and its position in the market. Other advantages include reducing risks relating to signing leases, obtaining financing, and vicarious liability for employees.
   
Q. What is a Franchise Disclosure Document (FDD)?
   
A. Before a franchisor is legally permitted to sell a franchise, the franchisor must comply with the rules of the Federal Trade Commission (FTC) and statutes enacted by the State of California and any other state(s) into which the franchisor is selling. The purpose of these laws is to require the franchisor to provide a prospective franchisee with the information needed to make an informed decision as to whether or not to purchase the franchise. The FDD is similar to the older UFOC but does contain differences. As of July 1, 2008, all franchisors must use the FDD format and are no longer permitted to use the UFOC format.
   
Q. What kind of information is in an FDD?
   
A. A FDD consists of 23 separate items of information and is intended to provide a prospective franchisee with all of the material information about a franchise system that the prospective franchisee will need to make an informed decision whether or not to purchase the franchise. An FDD is similar to a stock prospectus in that its purpose is to provide sufficient detailed information so that a prospective franchisee can make an informed investment decision.
   
Q. What happens if I sell a franchise without getting it approved?
   
A. A FDD consists of 23 separate items of information and is intended to provide a prospective franchisee with all of the material information about a franchise system that the prospective franchisee will need to make an informed decision whether or not to purchase the franchise. An FDD is similar to a stock prospectus in that its purpose is to provide sufficient detailed information so that a prospective franchisee can make an informed investment decision.
   
Q. Are franchise agreements negotiable?
   
A. There is no law preventing franchisors and franchisees from negotiating the terms of a franchise agreement. Franchisors often say their franchise agreement is non-negotiable. The truth is that some franchisors are willing to negotiate terms, and some terms are more negotiable than others. For example, while franchisors may not be flexible in negotiating their royalty fees, they may be agreeable to negotiating other terms. Generally, whether a franchisor is willing to negotiate terms is a matter of leverage. It clearly helps to have a franchise attorney representing your interests.
   
Q. What are the most common types of disputes between franchisors and franchisee?
   
A. Disputes regarding:
  • The termination of the franchise agreement,


  • Renewal provisions,


  • Use of advertising funds,


  • The sale of the franchisee business, and


  • Trademark violations.


A well written franchise agreement can eliminate or at least minimize these types of disputes.
   
Q. What is the number one reason businesses develop franchises?
   
A. Selling franchises is similar to making an initial stock offering (IPO) because outsiders are given an opportunity to purchase an interest in an existing business operation. Franchising permits a business to expand rapidly over a diversified geographical area with relatively minimal capital, providing an opportunity for the franchisor to make money. See Ten Reasons to Franchise Your Business.
   
Q. We own and operate a small but successful business that we would like to franchise. Our capital is limited and we are concerned about making an open - ended commitment to spend money on attorneys fees to create a successful franchise. Do you have any suggestions?
   
A. Yes. We can often provide a client with the necessary franchise services for a fixed legal fee so that you can determine your cost of legal services with accuracy. In addition, upon your request, we will consider accepting certain goods and / or services as barter for all or a percentage of the legal services provided.
   
Q. I am considering the purchase of a franchise and have been reading various Franchise Disclosure Documents (FDD) / Uniform Franchise Offering Circulars (UFOS). Without exception, every one I have read is very complex and one sided in favor of the franchisor. How much would it cost me for a legal review so that I can make an informed decision?
   
A. For $950, we will review a FDD / UFOC and proposed Franchise Agreement and then prepare an opinion letter that will address the most legally significant provisions. Our intent is to enable you to make an informed decision before investing thousands of dollars, thousands of hours of your irreplaceable time, and sign a contract that may bind you for years. We believe in the concept of franchising but want you to avoid making a mistake.
   
Q. We recently purchased a new franchise and are highly satisfied with it. Can you help us form an association of franchises to enable us to help each other and to bargain collectively with the franchisor in areas where it is appropriate?
   
A. Yes. We would be pleased to assist you in forming an association of franchisees. There are many benefits including possible cost savings.
   
Q. We have owned and operated a small publishing business for several years and believe it could be used as the basis for creating a successful franchise. We don't know where to start. What type of budget will we need?
   
A. Our no - cost initial consultation was designed to help people like you and to provide us with the information needed to help answer your questions.
   
Q. In your opinion, what types of businesses are the most feasible to franchise?
   
A. First, there should be a strong demand for the product or service and the business should be profitable. The business should not be so complex that it is extremely difficult or impossible to explain it in an operations manual. It should also be the type of business that would appeal to the large percentage of people seeking to own their own business. While there are hundreds of possibilities, some of our choices include: publications, security guard and patrol services, property management, real estate brokerage, restaurants, janitorial services, commercial leasing, plumbing contractors, HVAC contractors, bookkeeping services, insurance brokerage, and business opportunities brokerage.
   
Q. I am considering starting a franchise with a co-owner. What are some of the advantages of having a co-owner in a franchisee company?
   
A. While there are also some disadvantages, advantages include the following:
   
 
  • Each co-owner can concentrate on specific areas of the business based upon his or her individual knowledge and experience;


  • Each can contribute to the initial capital of the business;


  • Each can contribute future capital for expansion and / or acquisitions;


  • Each can use his or her resources to sell products and services;


  • If you select the right co-owner and use a qualified attorney to document the relationship, your risks will be lower and prospects for success higher.
   
Q. If I only want to sell two or three franchises, am I still required to go through the same legal process?
   
A. Yes. However, the legal fees may be as low as $15,000 to establish a franchise and it may be possible to pay for some or all of the legal fees through barter.
   
Q. Before you represent a client in franchising a business, do you consider the possibility of developing a simple licensing agreement?
   
A. Absolutely. This is our standard practice.
   
Q. How can a franchisee be certain that the franchisor will provide long term support including advice?
   
A. As a prospective franchisee, you need to recognize that the long term success of a franchisor is tied directly to the success of its franchisees. Franchisors make most of their money from royalties which are generated when franchisees earn income. Franchisors earn additional money by selling franchises. However, a franchisor’s long term success in selling franchises is tied to the reputation of the franchisor which is directly tied to its relationships with its existing franchisees. In short, it is in the best interest of a franchisor to do everything reasonably possible to make its franchisees successful. That includes providing long term support and advice.
   
Q. What is the difference between a franchise consultant and franchise broker?
   
A. The terms franchise consultant and franchise broker are terms of art or industry terms.

Franchise consultants assist prospective franchisees in determining what franchise they should purchase. Generally, franchise consultants represent many franchisors and have made arrangements with them to get compensated a percentage of the franchise fees the franchisors collect from their referrals. Their compensation does not increase the cost to the franchisee because it is paid by the franchisor for its marketing activities and for qualifying each referral. In short, the prospective franchisee obtains the assistance of the franchise consultant at no cost while the franchisor receives a qualified prospect.

Franchise brokers are licensed real estate brokers that represent buyers and sellers of existing, operating franchised businesses. These brokers are also known as business opportunity brokers. They also represent buyers and sellers of non-franchised existing businesses.
   
Q. What do you consider to be the lowest risk businesses to start during a recession?
   
A. If you have the required knowledge and sufficient capital, the following businesses tend to do best during recessions:
       
Baby Proofing Service Judgment Collections
       
Business Brokerage Locksmith Service
       
Collection Agency Property Management
       
Consignment Stores Security Alarm Sales
       
Hair Cutting Subleasing Office Space
       
Q. I own franchise restaurants in Los Angeles, Santa Monica, and Pasadena. The franchisor is in the process of conducting an audit because they believe I am under reporting my income and under paying royalties. I have been profitably operating my franchises for more than five years. The term of the franchise contract is ten years with two, five year options to extend. What can the franchisor do if it turns out they are correct?
   
A. While I have not read your franchise contract, most of these agreements permit the franchisor to terminate the contract if the under reporting was material. Often, under reporting is considered a non-curable breach of contract that places the franchisee at great risk.
   
   
   
   
   
   

 


 

 

All contents ©2017 MTCLaw.com. All rights reserved.