Starting a franchise can be a great opportunity for an entrepreneur to enter the market and begin building a successful business operation. However, a franchise agreement can end up restricting the business owner to such an extent that the franchisee finds it impossible to make the business a success.
A franchise attorney can help potential franchisees by reviewing all documents and contracts, negotiating to get the best terms, and help avoid any potential problems down the road. From choosing the right business entity, to reviewing disclosure documents, to stepping in when things go wrong, a franchise attorney can be a strong ally for individuals looking to start a franchise.
Franchise Disclosure Document Review
The Franchise Disclosure Document (FDD) is one of the most important things to consider before starting a franchise. The FDD is a legal disclosure that a franchise must provide to potential franchisees before any money is exchanged or a franchise agreement is signed. There are multiple sections of the FDD that provide basic information to the potential franchisee, to allow them to make an informed decision about getting into the franchise. These sections include:
- Franchisor and affiliated businesses;
- Business experience, litigation, and bankruptcies;
- Initial fees and other fees;
- Estimated initial investment;
- Restrictions on products and services;
- Franchisee's obligations;
- Franchisor's assistance;
- Trademarks, copyrights, and IP;
- Obligation to participate in the business operation;
- Sales restrictions;
- Renewal, termination, and transfers;
- Dispute resolution;
- Financial statements;
- Receipts; and
- Other required disclosures.
Review Franchise Contracts and Agreements
The most important part of starting up a franchise is to understand your rights and responsibilities under the franchise agreement. The franchise agreement will lay out the basic terms of the contract, penalties for breach of contract, and how future renewals and modifications can impact your business.
Getting into the franchise business is often approached with optimism. However, it is important to consider what might happen if the business is not as successful as anticipated. A turndown in the economy may be out of the franchisee's control and the contract may not provide for flexibility in payments and percentages to allow the franchisee to continue working through the tough times.
An experienced franchise attorney will protect your legal rights, advise you of your options, and make sure you have all the information available to make the best decision for your future business.
Issues to Consider in the Franchise Agreement
There are a number of issues that potential franchisees need to consider when reviewing franchise agreements. Many new franchisees focus on the initial start-up costs, liquidity requirements, and licensing fees. However, there are a number of other terms and conditions that can impact your ability to make the franchise a success into the future. Issues to consider include:
- Renewal limits and options,
- Early termination,
- Ability to sell or transfer the business,
- Marketing support,
- Business support,
- Franchise territory,
- Non-compete restrictions,
- Right of first refusal,
- Intellectual property rights,
- Opening schedules and timelines,
- Arbitration agreements, and
- Competing franchisees.
Negotiating Franchise Agreements for Franchisees
Many new franchisees do not think about negotiating franchise agreements. A lot of people look at the franchise agreement terms and conditions and believe that their options are to take it or leave, and most of the time, they just take it. Franchise agreements can be negotiated. The amount of flexibility may be limited but any changes made in your favor can make a difference to your bottom line.
For example, increasing the area of your exclusive territory can increase your market base, reduce competition from newcomers, and give you more flexibility to get your business up and running. Another important area for negotiation may be in strengthening your renewal rights. After starting a profitable franchise, the last thing you want to deal with is the franchise not renewing your agreement, putting an end to all the work you've done.
Talk to your franchise attorney about what terms may be negotiated and how to improve the contract in your favor to put you on the path to success.
State and Local Franchise Regulations
Coming to an agreement with the franchisor is not enough to get your business up and running. Many franchisees are ready to move forward only to learn about state and local regulations and zoning restrictions that have a serious impact on their ability to run a franchise. Some states require registration and regulations for offering, selling, or operating a franchise.
Currently, Massachusetts does not have heavy regulations for franchises; however, neighboring New York and Rhode Island have more regulations for franchises, which could impact a franchisee's ability to expand beyond state lines in the future.
In addition to any franchise-specific regulations, all business owners need to be aware of the complex and ever-changing state, county, and local business regulations, including registration, reporting, taxation, zoning, and employment regulations.
Anticipate Potential Issues and Disputes
Your experienced New England franchise attorney will be able to anticipate a number of potential issues and areas of dispute to help avoid those problems in the first place. However, if a dispute arises, your attorney will be ready to protect your interests. A benefit of having a franchise attorney on your side from the beginning is that your lawyer will be familiar with the franchise, franchisor, and the contracts in question.
Immediate action can help save you time and money and help settle any issues before they become bigger. Talk to your franchise attorney about starting a franchise so you will have all the tools necessary to make your new business a success.
Experienced New England Franchise Attorney
From negotiating and preparing franchise agreements to litigating franchise disputes, with our extensive business litigation experience, we understand how to help franchisees get started with the best chance for success. The Katz Law Group, P.C. has more than 20 years of experience with business law in Massachusetts and across New England, including franchise operations. Contact the Katz Law Group today.