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.

A sample franchise contract must be sent to the franchise applicant by franchise law but there is much more you can do with it with a little creative thinking.

A copy of a sample franchise contract is required to be sent to the hopeful franchise owner shortly before D-Day when you and that starry eyed future franchise magnate sit down to sign the formal franchise agreement template document. When you get ready to roll out hundreds or more franchise ownerships, it is easy to have a standard sample franchise contract on the shelf that you ship out just to punch the clock and live up to that quirk of the franchise rules.

There are places you can download a sample franchise contract template that is generic.  It is easy to consider simply sending that to the franchise owner and let it go at that.  Of course, if do that, when the franchise owner sits down to sign the actual franchise agreement form that will turn into a long term franchise relationship with you, he or she may find some surprises.  That is a situation that you should avoid at all costs because surprises when you are ready to seal the deal and collect those fat franchising fees can put big storm clouds over the relationship.

It takes more work but make it a part of your franchising program to send to each franchise applicant a sample franchise contract that is exactly what he or she will sign not that many days later. Much depends on how customized you make your sample franchise agreement for each franchise applicant.  The more you bend over backward to make each franchise relationship unique and a perfect fit for that particular market and franchise owner, the more success and big bucks you can expect from that franchise sale.

The sample franchise contract is a great way to stimulate conversation and relationship with your franchise partners.

There is no getting around that you have to send that sample franchise contract because that is spelled out in franchise law in bold letters. So while you are doing your duty as a good franchise operator and sending along that sample franchise contract, why not get some good from this step along the path to adding a new franchise to your chain?

Along with the legal hoops you jump through to take that raw franchise owner recruit from application to closing the deal, there is an educational path to take each new franchise owner through as well. Even if the franchise applicant is an old pro at buying franchises, if this is the first franchise they have bought from you, they need to learn the ropes. The sample franchise contract is a great step to stimulate questions and to get a dialog going with the franchise applicant.

Along with the sample franchise contract, you can send support material that encourages the new franchise owner to ask questions and arrange meetings to clear up any hazy areas about that document or any other quirks of the franchise relationship. A smart franchise buyer will turn into a much better franchise owner who will deliver the goods when it is time to roll up his sleeves and turn that franchise into a huge money making operation. You can help that new member of your team become that productive by using the sample franchise contract step of the process to build that partnership into something that will stand the test of time.

You send a franchise contract example to comply with franchise law but it can do so much more than just keep you legal.

You are required to send a franchise contract example no less than a week before the time comes to sign contracts (franchise agreement, OM  etc… ) and make the franchise relationship between and that new franchise owner a binding marriage.  When you think about it, one week is not much time for a potential franchise owner to review a legally binding document that will become his or her new life for many years to come. That is why when you are developing your plan to get good franchise information to future franchise owners, it is smart to do more than what is required by franchise law.

The process of sending to hopeful and wide eyed franchise applicants things like the franchise disclosure document and the franchise contract example is dictated by law so that nobody puts their name on the dotted line not knowing what they were getting into.  In the history of franchise development, there have been plenty of cases of fraud and companies selling fake franchises only to take a powder with the franchise fees and leave some heartbroken franchise applicants with nothing left but broken dreams.

The heavy handed legal overhead that requires that you send documents like the franchise contract example are part of the steps the government watch dog types did to get in the middle of the process of building a franchise relationship and make everyone play nice. That background might help you not dread every minute that goes into preparing workable documents such as the franchise contract example because these documents are the building blocks to one of the truly great business relationships you can have when that franchise owner kicks in and starts making piles of money for you.

Don’t let the franchise contract example do all the hard work of building a relationship with that franchise owner.

It is easy enough to do the bare minimum when putting together the franchise contract example.  You can send along basically a replica of the franchise agreement that will be signed when that big day comes to make the franchise relationship permanent.  But instead of seeing the franchise contract example as a big fat nuisance, think again.  What it really should look like to you is a big fat opportunity to build a solid relationship with each new franchise owner.

If you put yourself in the shoes of that new franchise applicant, unless they are a seasoned old pro at buying a franchise, they are looking to you to guide them through the process.  By making the process easy rather than hard and by using tools such as the franchise contract example to replace that look of confusion and fear with one of trust and excitement, you will have worked some serious magic and built a friend for life in that new franchise owner.

That friend for life will work like a Trojan to build the best possible franchise for you.  By simply delivering that franchise contract example with time to spare, you are helping that franchise rookie understand every paragraph of that important document.  Then by opening lines of communication so questions can be asked, those interactions turn into a business relationship that will result in a dynamite franchise partner who will just keep on delivering the goods for you year after year after year.

Your small business operations manual can keep you on the right side of the rules and regulations of running your small business.

A small business operations manual is perhaps even more important to a new franchise owner than to someone running an autonomous small business.  There is a trade off that you get when you land that big deal to open a franchise of a very popular brand name. The trade off that benefits you because when you sign that franchise agreement, you have the rights to hang that highly recognizable franchise name on your building and inherit the massive crowds of customers that will come to you because of that name.

This is not to say that you are going it alone because among the other massive documents that will flood your mailbox will be a small business operations manual that will help you understand exactly how to look, act and smell like every other franchise in the chain. That franchise operating manual  is your bible for how to make your franchise take off like a rocket to huge sales and profits.  It contains the assembled wisdom of an army of gurus who are locked in little rooms back at the franchising company headquarters cranking out documents like your small business operations manual to make you a success.

You are not expected to have been born knowing how to make that franchise a stunning success. But you are expected to read and know well every rule, regulation, guideline and suggestion in the small business operations manual that the mother ship gives you.  Don’t see this as a tedious imposition by the bosses. Instead see it as a lifesaver for your franchise because the people who know very well how to make big piles of cash are passing those insider secrets to you in exchange for your franchise fees.  That is an excellent swap.

Look to your small business operations manual to keep the legal hounds off of your back.

If all the small business operations manual will do is make you rich beyond your wildest dreams because you learned to run a hugely profitable franchise outlet, that would be plenty. But just as important are the legal tips that pop up in your small business operations manual on how to keep your franchise running squeaky clean with the law. Those legal sand traps that your small business operations manual can keep you out of include tax requirements that the city, state and federal government are very interested in seeing you live up to.  They include other quirks of the law like how to run a safe store or how to treat your employees in a way that avoids lawsuits.

These guidelines in your small business operations manual can keep the lawyers and other legal trouble makers away from your door so you can focus on the big job you have of making big money running your franchise outline. Toss in there that there are a rats nest of franchise laws that you have to live with because you signed that franchise agreement.  The franchise relationship is a legally binding marriage so the last thing you need is to have some quirk of the franchise law jump up and bite you on the toe because you did not know about it.  Know about it by making your small business operations manual your best friend in the world.

Reviewing the franchise agreement forms that you sign with a franchise owner makes sense because you might want to cut them a better deal or cut them out.

The franchise agreement forms that you send out to a prospective franchise owner are not “till death do us part.”  While you are selling that franchise to a small business owner and it is he or she who will run their operation, the rights to that franchise are still with the franchising company. That is why the language that you put into the franchise agreement forms should include some escape clauses so that if the franchise owner makes a mess of things, you have a way out.

Franchising your company  is a big step and there are steps you can take to make sure the partners you bring onto your roster of players as franchise owners are up to snuff.  The various franchise agreement forms shift some of the burden of proof that they can carry their weight in the franchise relationship to those starry eyed new franchise owners.  By making it a serious requirement that the franchise owner provide proof that when it comes to running a small business, they know their stuff, you avoid handing over that valuable franchise to someone who is going to run it into the ground.

There are variables in the franchise agreement forms that you can tweak based on how well this new franchise applicant gives you the warm fuzzies that they will do well.  If you have secret doubts that a particular franchise applicant might be a dud, you can hike up the initial franchise fees within the franchise agreement forms.  That way you build in some insurance in case you have to go in and clean up some messes.

You can also adjust the term of the franchise agreement forms so that an iffy franchise comes up for renewal faster than might be standard. If you set that renewal to come up in a year and make that the law of the land in the franchise agreement forms, then you have a legal way to cut and run if they do badly.  But if they turn out to be all star business managers and their franchise is knocking down serious money, you can make adjustments when you renew the franchise agreement forms.

Making some changes when franchise agreement forms are renewed gives you a window to turn a good franchise owner into a great one.

All franchise agreement forms spell out so anyone can get it that the franchise will expire at some moment in the future.  While the idea of renewing the franchise agreement seems on the surface to be at time when either franchisor or franchisee can run for the hills if they need to, it is also a chance to kick a very successful franchise owner into high gear.

If you have a franchise owner who is kicking backside and taking names when it come to profits, you can sweeten the pot in the franchise agreement forms to make his or her next tour of duty even more of a profit machine. You may wish to sweeten the pot with a nice looking franchise royalty arrangement that lets the franchise owner keep more gold in his or her bank account if they break a few sales barriers.  Or you can offer that knock-your-socks-off franchise owner a way to build an empire through a master franchise agreement.

These changes are all perfectly legal within franchise law and they are what capitalism is all about. When you can capitalize on your all stars and cycle out the dead weight leveraging those franchise agreement forms term limits, that is just smart business that will result in a dynamite team of franchise owner that you will profit from big time year after year after year.

The format of franchise agreement will take some getting used to but by understanding it advance, you will fly through the process of buying your own franchise small business

When you are new to the process, the format of franchise agreement will seem very odd to you. The franchise agreement is a unique animal that will not read like the newspaper or even a business memo that you ever saw in your life.  That is why it is smart to take some time to understand the format of franchise agreement before the moment of truth arrives and you are ready to click your pen and sign your life away investing in a new franchise opportunity.

You should remind yourself that the franchising company does not mean to make the franchising documents cryptic or hard to understand.  Much about the format of franchise agreement is simply the nature of the beast and it is you who is getting used to this new way to conducting a business discussion.  There will be new terminology that makes up the format of franchise agreement and you will be expected to have already become a native in the world of franchising long before the final franchising documents are signed and it is time to roll up your sleeve and get to work building a world class franchise outlet for the company whose name is now outside your building.

One way to get that feeling of disorientation that could happen when you start to look at the format of franchise agreement for the first time is to look at it well in advance of any formal steps that will happen when you and the franchise get serous about working together. There are plenty of ways to get that orientation on the fly.  You can download templates that will show you the format of franchise agreement as well as the contents and how you should go about slicing and dicing that tricky document when the next one you see has your name on it.

Don’t let the legal language that is part of the format of franchise agreement throw you.

One reason that the format of franchise agreement is awkward to the average Joe or Jane is that the franchising company has to let the lawyers in the room when the franchise documents are prepared.  The entire franchising process is heavily regulated from the handshake to the final agreement process and even past that too.  Before we scream conspiracy theory about the evil interference of government, keep in mind that most of that oversight is for the benefit of the franchise buyer and that the franchising industry has exploded since the feds got their fingers in the middle of it with so much franchise law.  So having that much regulation may not be such a bad thing.

But all that regulation makes for some very strange language in the franchising documents which makes the format of franchise agreement very weird to the regular person. It might be smart to get your own set of franchise legal wizards in on the act when you start looking at the format of franchise agreement for the document that will become your marriage license in this new love affair with the franchising company.

You will be able to see the actual format of franchise agreement for the paperwork that you will sign at least a week before the date of the big step to take ownership over your own franchise comes along.  Jump all over the sample format of franchise agreement that they send to you and have your overpaid franchise lawyers jump all over it too.  If you do that, you will be able to waltz into the meeting to sign on as a new franchise owner knowing that you did your part to make sure you know what is what and that this is a sweet deal for you and for the franchising company.  If you did your homework well in reviewing the format of franchise agreement, you may be in for a very profitable new franchise experience indeed.

Franchise licensing is essential to winning a franchise and it could be just the right structure you need to start your own business.

Franchise licensing is the legal tool to make sure that the franchising process is handled correctly. One of the big motivations for franchising a small business is that entrepreneurial streak that many of us have to own and run your own business. There is nothing wrong with that inner drive to want to get away from being a servant to “the man” and run the show for yourself.  Franchise licensing is what spells out the rules of the road for using the franchising route to achieve your dream of running your own money making operation.

The one drawback to starting your own small business from the ground up is a drawback that those franchise licensing documents can help to take care of.  The drawback is that there is almost too much freedom and lack of structure when you start your own small business. It helps to have some structure so you know what to do next and how to live up to expectations and you have a road map to what to do next.

The value of going with a franchising solution even with the overhead of franchise licensing is the structure the program that you get from the franchising company. That structure is highly regulated and the franchising company will put that road map in front of you that you pretty much are forced to follow because the franchise licensing arrangement are not just a bunch of pretty ideas. They represent franchise law that neither you nor the franchising company can get frisky with that.

Holding the franchise company to live up to their end of the franchise licensing agreements.

You are a smart one to jump back and think about the good as well as the scary part that franchise licensing will bring to your world when you sign those franchise agreements.  Anyone who launches out without thinking hard and long about franchise licensing and what it means should find the door locked when it is time to sign those agreements and enter into that binding relationship with a franchising company.

At the same time, keep in mind that those franchise licensing rules and regulations go two ways. Sure they hold your nose to the grindstone to create a knock-your-socks-off great franchise for the franchising company.  But those franchise licensing details also hold the franchising company to a standard so they have to pony up as part of the relationship too.

You can dig out the details of exactly who does what, when and how in the franchising relationship in the franchise disclosure documents that you will get early in the cycle of developing your love affair with the franchising company.  Be sure you become an insatiable reader and that you understand everything in those documents as well as in all other literature you get from the franchising company.

By understanding how you have to salute the flag according to franchising agreements and how the franchising company must bring some serious stuff to the table too, you will be able to work as a full partner in the building of your new business.  That means serious success and serious money for you and the company whose sign is on the door and in that way, everybody wins.

When the bulky franchising documents start coming your way, instead of feeling intimidated, look on this phase as part of your basic training in becoming a franchise owner.

When the many franchising documents that you must review begin to flood your mailbox, don’t give in to the impulse to hide under the bed.  First of all, the franchising company is not trying to scare you out of your wits with those huge franchising documents full of legal statements of everything from the money you have to pay to how hard you are going to have to work. In fact, the franchising company has to send you all of that franchise information because if they don’t, they are going to be in hot water with franchise law.

When you sit down to sort out the massive amount of detail that comes flying at you in those franchising documents, the divide and conquer method is a smart plan. A good example is the franchise disclosure document which may be so bulky that you have to carry it in two hands for fear of dropping it and breaking a toe.  It is huge for good reasons. By law the franchising company has to disclose every tiny detail about themselves and about what will happen every step of the way on your grand adventure into buying a franchise from them.

This is not light reading. But you should gather your courage and face your fears when it comes to reading that disclosure document or the many other kinds of franchising documents that will come your way.  Overwhelmingly franchising documents must be prepared with you in mind.  That means two things that should cheer you up.  First it means that when you sink your teeth into franchising documents, you will find that franchise law is on your side.  So while those franchising documents are massive, they are your best friends in getting ready for buying that franchise.

On the job training in franchising document form.

The second happy news is that it is the law that franchising documents should be written so you can understand them.  They are not going to be a bunch of legal gibberish that only an overpaid lawyer will understand. They will make sense to you once you get a cup of coffee and sit down to take it all in.  So take your time and dive in head first.  You may like what you find.

Look on the time you have to invest in reading those big franchising documents as a type of on the job training. If you ever thought that it would be great if you could break into the franchising company’s offices and read their secrets, put away your burglars mask and flashlight.  It is all there in those franchising documents and it is being given to you without cost and without you having to break the law.

Even though franchising documents are intended to be understandable to the average Joe or Jane who is interested in buying a franchise, do not be afraid to have your own franchise lawyer look them over.  You have that right and a franchise lawyer who has your back may find areas for you to question before you plop down your hard earned money to buy that franchise. So be nosey and insist that you understand everything in those franchise documents and that it all is what you like. If you do that, you will sail into that franchise relationship ready to take on this big adventure and turn it into a massive success that will fulfill you dreams and make that franchising company pretty happy as well.

 

 

Franchise regulations are inescapable as they are part of every aspect of the franchising process but you can use that to your advantage.

There is no getting around franchise regulations when you get started on your plan to franchise your company.  It seems that lawmakers and politicians have worked weekends to come up with franchise regulations that can get their noses into just about every aspect of the franchising process from the opening phone call to the celebration cocktail party when the deal is done.

It isn’t like there was not already a lot of hard work to be done to get your company gets ready to launch into the huge change that will come when you begin to sell franchises of your successful business.  Of course, you already knew that much of the process of bringing new raw recruit franchise owners on board was going to mean some communications would have to happen.  Franchise regulations are just there to make sure that for every franchise arrangement, those documents that get presented to the franchise applicants are standardized and that there are no details left out of any of them.

Franchise regulations kick in from the earliest stages of setting up a franchise arrangement.  Franchise regulations get almost ridiculously detailed about what will go into your franchise disclosure documents,  your franchise agreements and your franchise operations manuals.  It is easy to get a little ticked off about how much franchise regulations hog the center stage for a project that should belong to you.  But instead of seeing franchise regulations as a big pain in the neck, look on them as an opportunity.

Putting some spin on franchise regulations

Franchise regulations are far more interested in protecting the new franchise owner than in being a tool to make the franchising company feel happy inside. In a way, you can see why this makes sense in that the rookie franchise investor could be open to a scam or two if they are not dealing with a good clean franchisor like you.  So use that bias toward the franchisee in the franchise regulations to your advantage.

Pile up plenty of good old marketing language in the cover letters to your cover letters for franchise documents making sure the franchisee is informed loudly that these complicated documents are that way because franchise regulations are there to protect the little guy. That spin is not there to fool anyone. Instead it is there to make sure you use those scary and intimidating documents as tools to assure the timid future franchise owner that franchise regulators are their best friend and that you are too.

Also do not try to keep the franchisee from using a franchise lawyer to make sure the franchise documents live up to every comma and semicolon of franchise regulations. If anything encourage them to retain their own franchise lawyers.  By sending that message that “we are in this together”, you use franchise regulations to cement that love affair with your future franchise owner. It is a love affair that will result in lots of success and piles of money in your bank account and for the franchise owner too.  So spin away because it is good for everyone involved in this big adventure of franchising your business.

 

 

Creating franchise disclosure documents is required by franchise law but the focus of your work in writing them is to turn good franchise managers into great ones.

Franchise disclosure documents are required to be sent to any potential franchise owner well in advance of when the franchise agreement is signed.  That is not just a friendly reminder from your neighborhood franchise lawyer.  That is the franchise law and to not do it would bring your franchise program to a grinding halt. It is easy to see this requirement that you give to your future business partners such an in-depth and detailed amount of franchise information as an imposition and a burden.

These franchise disclosure documents will be one of the biggest challenges that will face you as you prepare to put your business into a new level of expansion through franchising.  Many disclosure documents become very large and there is no getting around the fact that you, the business owner, must be involved intimately with every page of those documents.

There is no passing this task off to a low level clerk or a ghost writer.  Franchise disclosure documents become part of the legal paper trail of your franchising effort.  To put it bluntly, what you hand over to future franchise owners in franchise disclosure documents becomes legally binding. So it is crucial that you approve and edit every page, every paragraph, and every line.  The best case scenario is that you write every word of the franchise disclosure document or at least that every thought in that massive documentation project are your thoughts.

Look at franchise disclosure documents as an opportunity rather than a problem.

There are two reasons to fight off the urge to look on the preparation of franchise disclosure documents as a nuisance and a burden that the government has come in and heaped on your already too darn busy schedule.  For one thing, if you resent having to prepare your FDD franchise disclosure document, you will probably do a shoddy job of creating this crucial document. That is not a good idea both because it is lazy and because of the negative impact it will have on your hopes and dreams for great success in franchising.

The second reason to put some tender loving care into creating franchise disclosure documents is because the franchise buyer is required to know inside and out what you put in there. That makes franchise disclosure documents valuable training tools.  Here in this one piece of required reading, you can put each and every new franchise owner through a virtual basic training in what it takes to be a great representative of your business.

The old, worn out saying that it is an opportunity instead of a problem applies truthfully to writing your franchise disclosure documents.  There may be no step in the process that is so full of potential to convert raw recruit franchising hopefuls into highly trained franchising experts ready to get out there and make big money for you. That is reason enough to work hard making franchise disclosure documents that you can be proud of.

 

 

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