If you’re interested in franchising, it’s important to understand the law and how it affects franchisees and franchisers.
What Is a Franchise?
A franchise has several elements that make it a legal franchise even if you don’t want to call it that. Some of those elements are detailed below.
The business uses the franchisor’s trademarks - commercial symbols on behalf of the franchise. They are granted a license to use that name for a specific period and to follow certain rules and regulations from the franchisor. In addition, the business pays a fee to the franchisor, usually based on revenues. Also, often the franchisor is in control of much of the advertising and marketing.
If you want to start or buy into a franchise, state laws will rule the process and purchase. The best course of action is to seek legal reputation from a franchise attorney in your state. If you’re going to buy into one, you should also get an attorney to look over the contract.
There are also some federal regulations for franchisors that need to be followed, and a franchise attorney will know what they are. Right now, there are 23 different disclosures that must be included in any franchise agreement. It’s quite in depth, so don’t try to form or join a franchise without the help of an attorney.
Franchise law is super-complex as there are so many different rules and regulations both statewide, nationally, and internationally. It can be quite expensive to fight a violation of the law, so it’s best to let the lawyers handle your idea or help you buy a franchise rather than doing it yourself.
Some things to watch out for are:
Non-Compete Agreements - If you enter a franchise agreement, it’s likely that you are also agreeing not to compete with the franchiser for a period of time. It might seem benign to sign this agreement, but if your business fails and this niche is your expertise and livelihood, you could end up not even being able to consult later.
Slip and Fall Rules – If you are part of a franchise, don’t think that corporate or the franchisor are going to help you out if you’re sued for someone getting hurt on the premises. Usually, the person who is operating the business is the one libelous. This means you need to be sure to purchase the right insurance.
Trade Secrets – As a franchisee, you may be prohibited from revealing to anyone any type of trade secrets of the business. This can be a very serious offense that can cost you your business plus money.
Trade Dress – A franchisor is well within their rights to enforce on your business a dress code and code of conduct. Ensure that you agree with it before you sign up with a franchisor. It’s the little things that can make a big difference in your life.
You Can Lose Your Business – Franchisees can easily lose their business due to the choices made by the franchisor. For example, if they choose to sell the business and then the new owner decides not to keep franchises. Not only that; the franchisor doesn’t have to renew your contract when the current one is up.
There are many complex regulations for franchisers but for the most part, if you enter an agreement as a franchisee, you’re beholden to that contract. So, do read it, and have your lawyer read it.