Franchise Law: What Franchisors and Franchisees Should Know

Whether you are interested in becoming a franchisor or a franchisee, it is important for you to understand basic franchise law and to consult a franchise lawyer for assistance with any legal documents.

Franchising has to be carefully regulated. Without such regulation, conflicts are bound to develop between the franchisor and franchisee, effectively undermining the operation of the franchise. However, it is not enough to simply regulate the varied aspects of franchising. The different parties have to make sure they understand all the aspects of franchise law that pertain to their agreement. They must make sure they are getting the best deal possible under the circumstances. After all, they are all in the endeavor to make a profit. It would be naïve and potentially financially disastrous for each party to assume that the other party’s lawyer had its best interests in mind.

 

Franchise Law and the Franchising Agreement

 

“Location” is just one aspect of franchising that is governed by franchise law. For a franchising agreement to be written up, a number of decisions have to be made regarding the location of a given franchise unit. Some of these will be determined by the law while others will be determined by the parties to the agreement. For instance, it has to be decided whether the franchisor or the franchisee will be responsible for locating the unit’s site. It also has to be determined whether to grant the franchisee the right to move the franchise unit if the building hosting it is condemned, if the business does not thrive as expected or if the lease expires.

Often, buying a franchise grants the franchisee exclusive rights within the territory in which his or her franchise unit is located. Typically, the franchisor is not allowed to sell a franchise unit to a second franchisee within the same territory as long as the first franchisee is still operating there. The precise rules governing such details depend on prevailing franchise law. However there is also some room for flexibility, giving the franchisor and franchisee the opportunity to negotiate over some of the features of the agreement.

Another important issue that will come up during franchising is trademark. A savvy franchisor will register his or her trademark long before trying to sell the first franchise unit. In so doing, the franchisor can avoid endless legal battles with other business entities that subsequently try to claim ownership of that trademark. The franchising agreement between the franchisor and the franchisee should cover trademark-related issues in detail. It should describe the trademark protections in place. It should also describe the steps that the franchiser and franchisee will take in the event of legal conflict with a third party concerning the trademark.

Credible Franchise Information: A Priority for Prospective Franchisees

If you are planning to become a franchisee, you will benefit greatly from having access to credible franchise information. This can constitute general information about franchising or details about specific franchises that you might want to buy into.

Starting a business of your own and operating it successfully is a gargantuan task. Apart from the financial demands and the amount of time that you have to put into the task, you have to take responsibility for accounting, operations, human resources, customer service, meeting legal requirements, and marketing and selling goods or services. This can be overwhelming if you have nobody but yourself to rely upon.

Buying a franchise is significantly different. You have to worry about the same issues, but on a smaller scale. Somebody else, namely the franchisor, will already have “invented the wheel” and perfected it. By choosing to follow in his or her footsteps, you will set aside the need to start from scratch. Instead, you will get the opportunity to build on the foundation that he or she has already established. A comprehensive review of detailed franchise information will give you clear indications of the role you will play.

Clearly, buying a franchise is less risky than establishing a business on your own. However, it brings with it its own set of responsibilities and requirements, all of which you have to meet. Running a franchise is best done from an informed position.  Hence, you have to make an effort to read and analyze as much franchise information as you can before making any financial commitments to a franchisor.

 

Using Franchise Information to Select an Appropriate Franchise

 

Choosing a franchise is a process to which you must devote plenty of time. The internet can be a valuable resource if you are searching for information about specific franchises. You can actually find websites devoted to franchise directories. Clicking on individual entries in these directories will give you access to detailed franchise information, including eligibility requirements, financial expectations and instructions for getting in touch with the franchisors.

You should select franchises which fit in the categories that appeal to you the most. For instance, a toy store franchise can be an excellent choice if you enjoy working with children. Make an effort to find out what running a given franchise would actually entail. An idea might seem appealing in theory, but the fact of having to operate the franchise for years could turn it into a nightmare. You should also make sure that operating a given franchise will not infringe on any of your ethical principles or values.

Franchise Documents: Drawing Up a Great Franchise Application

The franchise application is one of many franchise documents that must be thought through carefully. It influences the franchisor in selecting the best franchisees from what is often a wide pool of applicants. Hence, it is important for the application to elicit as much relevant information as is possible from each applicant.

One way to get a good sense of what a franchise application should look like is to buy a franchise package online. This will include a wide variety of franchise documents’ templates, along with suggestions for modifying them or personalizing them. Another way to get a glimpse at franchise applications is to simply perform a Google search for “franchise application.” The results will include actual franchise documents of this type as they appear on the websites of the corresponding franchise companies.

You should print out copies of those franchise applications associated with well-known and highly successful franchise companies. These are likely to have been drawn up by established professionals. Hence, they are bound to be top-notch documents. You should also print out the ones associated with the franchise companies that are most similar to the one you intend to form. If you want to franchise your coffee shop, then look up the franchise applications of cafes like Gimme! Coffee. Looking at other franchise companies’ franchise applications in this way will give you a sense of the different possibilities out there and get you thinking about why one variation of an application question might be more effective than another. This is a useful way of preparing to draw up your own franchise documents.

 

Basing Franchise Documents on Your Vision of the Ideal Franchisee

 

As you prepare franchise applications and other franchise documents for your prospective franchisees, it is important for you to envision the type of applicant that would make the most ideal franchisee for your franchise company. Your first instinct might be that a franchisee very much like you in character and behavior would be perfect. But this is highly unlikely to be true. Remember that the qualities that enabled you to found and run a successful business included innovation, creativity, the readiness to adapt to different circumstances and the willingness to think outside the box. These are not necessarily the qualities that would make a good franchisee. Keep in mind that franchisees must be good at following the plans and instructions that you have formulated for the franchise. Hence, you would do well to search for prospective franchisees who were good at sticking to established plans, but capable of working autonomously.

The Franchise Document

Some may argue that franchise companies are made or broken on the strength of their documents. Any franchise document that does not encourage an optimal franchisor-franchisee relationship will undermine franchising success. Hence, it is critical for franchisors to take care when putting together the franchise documents. Franchisees should obviously take as much care formulating their franchise applications and negotiating the terms in the documents drawn up by the franchisors.

In the Unites States, the terms of at least one franchise document are dictated by a party other than the franchisor or the franchisee. This is the Franchise Disclosure Document or FDD. The FDD entails a disclosure by any prospective franchisor about the earnings of his or her business, past and present, and the earnings forecast for the future. In addition, the FDD should indicate any aliases by which the prospective franchisor has ever gone as well as the details of any trademarks associated with him or her. It should also indicate any implication of the prospective franchisor and his or her directors in fraud charges or in bankruptcy filings. All the information contained in the FDD is designed to protect any franchisees from being taken advantage of by unscrupulous franchisors. The party that defines the terms of the FDD is the Federal Trade Commission. Hence its terms are sure to be objective.

 

The Template-Based Franchise Document

 

There are plenty of other documents relevant to the franchising relationship. Many of them can be drawn up and modified by franchisors who have access to business franchise templates. Drawing up a franchise document from a business franchise template ultimately costs less money than hiring professionals to assist you to do the same. The distinction between a document from one of these templates and one drawn up by a professional for a specific franchise company is that the latter caters more specifically to the needs of the franchise company.

That said, it is important to note that a prospective franchisor who has made the effort to research the franchising process in depth can modify a franchise document from one of these templates and come up with an end product that addresses his or her needs adequately. This makes it clear that some individuals are able to make franchising work for them, even though they have limited budgets and cannot afford to hire professionals to guide them through the entire process. At the end of the day, having these templates as a resource is cost effective, and it helps provide many prospective franchisors with much needed guidance.

Franchise Contracts

Franchisors’ relationships with their franchisees are framed by much paperwork. This paperwork includes franchise contracts, the most fundamental of the documents that undergird the franchisor-franchisee relationship. They are legally-binding documents that establish the terms by which the franchise will be operated and detail the franchisor’s and franchisee’s respective obligations.

 

The Contents of Franchise Contracts

 

Franchise contracts often comprise two key parts. The first part of the document is called the Purchase Agreement. The Purchase Agreement describes everything pertaining to the initial franchise transaction. This includes the franchise’s purchase price, and details about the inventory and other business equipment that the franchisee will receive. The nature of the inventory and business equipment will obviously depend on the type of business being franchised. Additional items that are likely to make their way into the Purchase Agreement include marketing support from the franchisor, help selecting the location of the franchise and the training that the franchisee will need to bring him or her up to speed on the operation of the franchise.

In addition to Purchase Agreements, franchise contracts also have Franchise Agreements. The Franchise Agreement is the part of the document that lays out the terms of the franchisor-franchisee relationship once the initial purchase transferring ownership rights has been concluded. It describes the respective obligations of the franchisor and the franchisee. Such obligations might include the regular services that the franchisor will extend to the franchisee or the expectation that the franchisee will maintain a certain standard of cleanliness and carry certain forms of insurance. The Franchise Agreement also describes the rights that the franchisor is extending to the franchisee, including copyrights, trademarks, and trade secrets. An absolutely crucial piece of information that every franchisor will want to include in the Franchise Agreement is money-related information: everything to do with the fees and royalties that the franchisee will pay on a regular basis once the franchise is up and running.

Franchise contracts are put together by franchisors with the help of franchise lawyers. The onus is upon the franchisors to determine the shape that the franchises will take. Thus, the documents often favor them by default. The role of the franchise lawyers is to ensure that the franchise contracts address every relevant aspect of franchising and are legally binding. Potential franchisees can challenge some of the terms presented in the franchise contracts before signing them. In this way, they can ensure that the terms and conditions given in the contracts are more favorable to them.

What Goes into a Franchise Application?

Many factors go into making franchise success possible. Among them is the selection of the right franchisees. The franchise application plays an important role in helping you identify those franchisees who will be a good fit for your franchising endeavor.

Designing a detailed and thorough franchise application is one way to ensure that you learn as much as you need to know about your prospective franchisees. If your application form asks all the right questions, you will be able to figure out which individuals are likely to contribute the most to the success and growth of the franchise. The most basic sections to include in your franchise applications are explored in some detail below.

 

The Features of a Good Franchise Application

 

First and foremost on the form should be a section for the applicant’s personal information. You should be clear about the types of information you are requesting and the level of detail you want to see. Contact information, biographical data, and information that will give you an indication of the applicant’s character are all crucial parts of this section. It is also important to get the applicant’s educational background, including all training relevant to the franchise in question. Along the same lines, the applicant’s employment history is also relevant. Descriptions of jobs held, their locations, and the earnings associated with them should be provided.

The franchise application must have a section dedicated to the applicant’s personal financial history. Such information should include the applicant’s current source of income, the income amount, any assets or liabilities, and the applicant’s net worth. If the applicant owns a business and has ever participated in some form of litigation or arbitration, this must be indicated. If the applicant is married, information should be requested about the spouse’s personal financial history. If the applicant happens to have partners or financial backers, then their financial information should be requested too. This section is crucial because it is the one that indicates to the franchisor that a particular applicant has the wherewithal to handle the responsibilities that come with running a franchise in good times and bad.

A wise franchisor will include in the franchise application a section in which the applicant is invited to describe what he or she knows about the franchise opportunity and why he or she wants to become a franchisee. This section is important because it gives the franchisor some insight into the applicant’s personality and shows whether the applicant has a realistic picture of what franchising will entail. Another important section that must be included in franchise applications is one requesting applicants’ preferred territories and their willingness to consider other alternatives.

Should You Expand Franchise Opportunities?

Now that you are a franchisor, are you content with the gradual pace of growth of your franchise company, or would you like to expand franchise opportunities more rapidly? The answer to this question is likely to depend on your vision for the franchise company as well as on the financial health of the franchise company and the individual franchises.

Turning your business into a franchise is like jumping over a huge hurdle. It is hard to achieve, but once you do achieve it, the going can be comparatively smooth. Some businesspersons are content to let their franchise companies grow at a slow, organic pace once they have jumped over this first hurdle and achieved a certain size. Others are more ambitious and want to expand franchise opportunities aggressively by bringing new franchisees on board and spreading to territories further afield. Which of these models is the better one to follow?

 

What Options Exist to Expand Franchise Opportunities?

 

It is worth pointing out that running a franchise company is not quite the same as running a small business. One obvious difference between the two situations is that of scale: any gambles made when running a small business are bound to be smaller and to have fewer, more containable consequences. With a franchise company, risky decisions are not only likely to affect a larger number of people, but they are also bound to have more numerous and more complicated consequences. Thus, any discussion of whether to expand franchise opportunities must be sober and well-thought out. Accelerated growth can have negative consequences for a franchise company. It can result in great losses for the new franchisees, and this can ultimately have negative repercussions for the brand name. Hence, it is better to act prudently and make decisions that are backed by the facts on the ground.

There is an appropriate growth rate for every given franchise company. It is important to determine what yours is. If the existent franchises are not doing too well, it might be an indication that the goods or services offered are not competitive. It might also indicate that the franchise territories as they exist are too small. These are situations that call for changes other than expansion.

Trying to expand franchise opportunities internationally is another possible consideration. This can be a wonderful opportunity for growth, especially since overseas markets are bound to be underexploited. However, if you take this path, you will have to contend with franchise regulations in other nations and logistical problems like supplying products and training to overseas franchisees.

Can I Franchise My Business?

If you have a thriving business and are thinking of expanding it, you have probably asked the question, “Can I franchise my business?” At the end of the day, the answer to this question depends on the state of your business and on your readiness to take on the role of a franchisor.

As you set out to answer the question “Can I franchise my business?” you should note that not all business people who try to franchise their businesses succeed at it. This happens for various reasons. To avoid ending up in a similar situation, you should do all your franchising “homework” ahead of time.

 

Can I Franchise My Business AND Do So Successfully?

 

The first thing you need to do is to look at the state of your business. Is it a successful business? Has it been performing well consistently? Your answer should be positive. In addition, you should already have units of the same business operating in a few different locations.

In order to succeed as a regional or national franchise, it is also ideal for the goods or services being sold to have something distinct about them that can be reproduced nationwide by people other than the franchisor. At the same time, there should be a demonstrated demand for them. There is no point in franchising a business that provides services or goods that are not sought after. Once the initial buzz surrounding the franchising dies down, there is no guarantee that the latter type of business will attract the attention of potential franchisees and customers. Undertaking market research is one of the ways to get around making this kind of mistake.

An important part of answering the question “Can I franchise my business?” involves seriously thinking about the changes that franchising will bring to the business and to your role in it. If you have very rigid ideas about the shape of the business, you may have to let go of some of them. Making the business more amenable to franchising might necessitate modifying part of your operation. It will certainly necessitate your adoption of a new role that entails marketing your ideas to others and teaching them.

If, after carefully considering all these steps, you are still interested in franchising, it is time to look into the legal requirements, financial arrangements and operational details that come with franchising. Your answer to the question, “Can I franchise my business?” will ultimately depend on your willingness to tackle these steps.

Business Franchise Templates

As a prospective franchisor you have surely heard about different ways to franchise your business. The so-called do-it-yourself route, incorporating the use of business franchise templates, is one of them.

Many franchising resources stress the importance of seeking professional help from franchise consultants and franchise lawyers for the most important steps of the franchising process. Franchise consultants’ knowledge and experience often put them in an ideal position to assess businesses’ potential for franchising and to advise which franchising path would work best for each individual business. Their biggest selling point is that, with the resources that they have, they can provide personalized attention to each prospective franchisor.

The analyses franchise consultants undertake and the recommendations they give are bound to take into account the idiosyncrasies of a particular business and its owner. They are also bound to recognize the role that the business can play in the broader market if it is franchised, and its likelihood to succeed. However, all of this personalized advice comes at a price. Paying professionals to walk you through the franchising process can cost a tidy sum. Furthermore, there is no guarantee that the particular franchise consultant whose assistance you seek will give you the best possible assistance. As does every field, franchise consulting has its share of mediocre people.

 

When Are Business Franchise Templates an Option?

 

In recognition of these problems, some people take care to shop around before finally settling on a particular franchise consultant. They may seek out a franchise consulting agency that comes highly recommended by successful franchisors. Others try to do without a consultant. Those who choose the latter path may turn to websites about franchising and seek out books on franchising to get a sense of what lies ahead. They may also look for business franchise templates, which they can then use to make franchise packages (containing all the important documents that govern the franchising relationships).

Business franchise templates cost much less than a franchise consultant’s services. However, they only include information about the most basic steps and documents involved in franchising. Thus, they give a prospective franchisor a sense of the basics that franchising his or her business will entail. They do not devote attention to special circumstances, nor do they anticipate unusual or unpredictable needs. Additionally, they do not provide the prospective franchisor with market research relevant to his or her business.

Clearly, there are disadvantages to going with business franchise templates, but some people swear by them. It is likely that these people had relatively straightforward franchising needs and also took the initiative to do much of the research that they would otherwise have paid a consultant to do.

Become a Franchiser and Watch Your Business Grow

If you are interested in seeing your business expand, there are some different possibilities you should consider. Among the more interesting ones is learning how to become a franchiser.

Franchising is not for the feeble-hearted. It is an endeavor that requires ambition and stamina. It can only come to fruition if a business owner is willing to do whatever it takes to become a franchiser. Business owners who are just fine with the current state of their businesses and have absolutely no interest in making revolutionary changes to the way they operate are probably better off not venturing into franchising. The process is so involving and drawn out that only those who are enthusiastic about it can stay the course and remain convinced that they have made the right decision.

Stamina is absolutely necessary because the franchising process takes a long time to bear fruit. It involves changes to one’s business, hours of paperwork, attention to legal requirements, and visits to banks and other financial backers. When the prospective franchiser becomes an official registered franchiser and has to start selling franchises, there is still a lot more work to be done. Prospective franchisees are not simply going to appear because one wants them to. Much work has to be done to market the idea to them and, essentially, to “court” them.

 

Recommendations on how to become a franchiser

 

If you are not fazed by these challenges then you should jump right into researching what it takes to become a franchiser. You could turn to online resources for this activity as well as to the local library’s books on business, entrepreneurship and franchising. You are likely to encounter useful recommendations along the way, including the ones outlined below.

First and foremost, you will have to determine whether your business is suitable for franchising. This will entail seeing that it meets the standard for innovation and replicability. It will also require research into the existence of a market for your proposed franchise.

Secondly, you will have to find out what the laws surrounding franchising are on both the national and regional levels. This is a pretty straightforward step as long as you intend to consult a franchise lawyer.

A third recommendation involves deciding what model you are going to adopt for franchising your business. You will have to think about such matters as the experience you want your franchisees to have and the amounts you want to charge them in royalties and franchising fees. In short, you will have to make the detailed guidelines by which you will operate your franchise.

These are just a few tips to help you understand a bit about what it takes to become a franchiser. To learn more, take the time to review the resources available to you.

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