Here is some information that our franchisee clients have found helpful. You may have additional questions about franchising. Einbinder & Dunn, LLP will answer all of your questions during your consultation.

Q. What is franchising?

A. Franchising is a method of expanding a business where the franchisor licenses its trademark and business system to you in exchange for your payment to the franchisor for the right to operate the franchise using the business system and trademark. You then conduct your business in accordance with the franchisor’s standards and specifications. Along with the right to use the franchisor’s trademark and business system, franchisors will typically provide franchisees with pre-opening training, post-opening training and overall support.

Q. What are the advantages of franchising?

A. The advantages to purchasing a franchise rather than attempting to start your own business can be great. In part, purchasing a franchise means buying a proven business system. As a franchisee, you tap into the franchisor’s knowledge of how to operate its business. This saves time that would normally be spent on development and cuts down on mistakes that are typical of young businesses. You also receive sufficient training to operate the business and ongoing support and assistance to help solve problems. In some instances, franchisors also create a national advertising program which benefits all franchisees by creating national exposure that would normally be impossible for new businesses.

Q. What types of franchises can be offered?

A. Generally, franchises fall into two categories. Franchises either operate in the retail sector or in any of the service industries. In each of these categories, a vast array of options exist in the types of franchises offered. For retail franchises, franchisors may offer anything from full retail store franchises to kiosk franchises to store-in-a-store franchises that offer all product lines, one product line or a combination of the product lines. Similarly, for service franchises, franchisees can offer a full assortment of services, one specific service or a combination of services. The types of franchises that may be offered are varied, each as unique as the particular business model developed by the franchisor.

Q. What is a Franchise Disclosure Document (FDD)?

A. Before a franchisor is legally permitted to sell a franchise, the franchisor must comply with certain rules promulgated by the Federal Trade Commission (FTC) and/or statutes enacted by the State the franchisor is selling from or the State the franchisor is selling into. The purpose of these rules and/or statutes is to require the franchisor to provide the potential franchisee with information for the franchisee to use to make an informed decision as to whether or not to purchase the franchise. Previously, franchisors prepared a disclosure document known as the Uniform Franchise Offering Circular (UFOC), which contained all of the material information necessary for the franchisee to make an informed decision. The franchisor was then required to disseminate the UFOC to each potential franchisee. In 2007, the FTC revised its Rule on Franchising. The FTC Rule requires that franchisors provide potential franchisees with a Franchise Disclosure Document (FDD) rather than the UFOC. The FDD is similar to the UFOC format but does contain differences. Franchisors are permitted to use the UFOC format until June 30, 2008. As of July 1, 2008, all franchisors must use the FDD format. When deciding on whether or not to purchase a franchise, it is best to have an attorney review the franchisor’s disclosure document.(Amended FTC Rule and FDD Conversion)

Q. What kind of information is in a FDD?

A. The FDD consists of twenty-three (23) separate items of information and is intended to provide you with all of the material information concerning the franchise system that you will need to make an informed decision as to whether or not to purchase the franchise. Conceptually, the FDD is similar to a stock prospectus in that the purpose is to provide sufficient accurate information so that you can make an informed investment decision. Among the twenty three (23) items of information contained in the FDD, the franchisor must provide a history of the franchisor and its founders, information relating to the types of products offered under the franchise and the general condition of the marketplace for those types of goods, a description of the initial franchise fees and all other fees you will pay during the course of the franchise relationship, a description of the kinds of assistance the franchisor will supply to you, an explanation of the system standards for advertising development and placement, site selection and build out and computer systems. The FDD will also detail the size and scope of the territory granted to you and will discuss the rights retained by the franchisor. Additionally, franchisors may choose to also disclose information relating to the financial performance of the franchise system or franchisees operating within the system.

Q. What are the more common areas for dispute that arise during the franchisee-franchisor relationship?

A. Generally, a dispute between a franchisee and a franchisor involves one of six (6) common issues. The six (6) issues relate to termination of the franchisee and enforcement of the post-term obligations, issues of vicarious liability, statutory compliance issues, fraudulent practices, intellectual property matters, territorial encroachment and general contract disputes. Many termination cases are brought by the franchisee in response to an improper termination of the franchise by the franchisor. Disputes arising from the franchisor’s failure to comply with registration, disclosure, relationship laws or other federal and state regulations are common. Also common are claims brought by the franchisee alleging fraud and misrepresentation by the franchisor, including fraudulent statements made by the franchisor relating to the franchisee’s potential earnings (typically called earnings claims). Often, other disputes center around the franchisor’s failure to comply with the franchise agreement in that the franchisor encroached on the franchisee’s territory, failed to provide ongoing training and support or failed to comply with a number of other requirements imposed by the franchise agreement. (News and Case Notes) 

Q. What things should I do before I purchase a franchise?

A. Einbinder & Dunn, LLP recommends that you do due diligence before purchasing any franchise. You should compare franchising opportunities within the industry you are interested in to determine which franchise is best suited for you and which franchise may be the most successful. Einbinder & Dunn, LLP recommends that once you have chosen to purchase a particular franchise, you speak with as many franchisees in that system as possible, including franchisees recommended to you by the franchisor as well as those that were not. You should also speak with former franchisees. Contact information for current and former franchisees is listed in the FDD. The firm also recommends that you retain the services of a lawyer that has experience in representing franchisees in all aspects of their business and that you hire an accountant to help you develop a business plan and to review the franchisor’s financial condition with you.

Q. What is Einbinder & Dunn’s experience in representing franchisees?

A. Einbinder & Dunn counsels franchisee clients in connection with transactional matters, including the acquisition of franchises and related issues, and in dispute resolution, including litigation, arbitration, and mediation. The firm calls upon its unique and extensive experience representing franchisors as well as franchisees to advise its franchisee clients with respect to the franchise relationship, helping them to minimize the risks associated with franchising. (Disputes between Licensors and Licensees within Franchise, Distribution, and Licensing Systems)

E&D assists franchisee clients in all matters relating to business development, including creating and structuring the franchisee entity and preparing all relevant agreements. Einbinder & Dunn also reviews all disclosure documents and franchise agreements, alerting its franchisee clients to any potentially dangerous provisions and negotiating with franchisors to obtain more favorable terms. The firm also advises its clients in the negotiation of renewals of existing franchise agreements. E&D represents franchisees in real estate matters as well, including the review and negotiation of purchase agreements and leases and resolution of environmental and building code matters. (Franchisee Tenant Checklist: Look Before You Leap Into a Lease) The firm also drafts agreements with third parties, including independent contractor, supplier, and employment agreements and confidentiality and non-compete agreements.

E&D efficiently represents franchisees nationwide in disputes with franchisors in state and federal courts and as well in arbitration and mediation venues. On behalf of franchisee clients, the firm has brought affirmative claims concerning, for example, earnings misrepresentations made by franchisors, franchisor misappropriation of advertising and rebate funds, and of course all manner of franchisors’ breaches of franchise agreements (i.e., encroachment, improper termination, unreasonable withholding of approval of sales of franchised businesses, among many others). Einbinder & Dunn regularly represents franchisee clients in disputes relating to non-compete agreements, confidentiality of trade secrets, continued use of proprietary marks, and other post-termination matters. E&D defends franchisee clients against claims of violations of systems standards, failures to remodel/refurbish, and trademark infringement/unfair competition and the like. The firm has, when appropriate, counterclaimed on behalf of franchisee clients alleging illegal discrimination and inequitable treatment of franchisors in violation of federal civil rights protection statutes.(News and Casenotes)

If Einbinder & Dunn can assist you, please contact E&D via telephone at (212) 391-9500 or email at info@ed-lawfirm.com.

Other Franchise Law sections:

• Einbinder & Dunn’s Franchise Practice
• Services for Franchisors
• FAQ’S for Franchisors
• Amended FTC Rule and FDD Conversion
• Is Your Business Franchisable?
• Comprehensive Franchise Review
• Services for Franchisees
• FAQ’S for Franchisees
• Representative Franchise Systems
• Franchise Articles and Media
• Franchise News/Case Notes
• Useful Links and Resources