Here is some information that our franchisee clients have found helpful. You may have additional questions about franchising. Einbinder & Dunn 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 a franchise in exchange for 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 exists 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.
Q. What kind of information is in an FDD?
A. The FDD consists of 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 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 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 seven common issues. The seven issues relate to termination of the franchisee and enforcement of the post-term obligations, 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.
Q. What things should I do before I purchase a franchise?
A. Einbinder & Dunn recommends that you conduct due diligence (i.e., research all available information on the franchise system) 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. Once you have chosen to purchase a particular franchise, 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. Are franchise agreements negotiable?
A. There is no law, rule or prohibition preventing franchisors and franchisees from negotiating the terms of a franchise agreement. Franchisors will often say the franchise agreement is non-negotiable. The truth of the matter is that some franchisors are willing to negotiate terms, and certain terms are more negotiable than others. For example, while franchisors may not be flexible in negotiating their royalty rates, they may be amenable to negotiating the required schedule for opening the franchised business, extending a franchisee’s time to do so. Generally, whether or not the franchisor is willing to negotiate terms — and if so, which ones and to what degree — is a matter of leverage. Factors may include how long the franchisor has been in operation, the size and scope of the franchise system, how eager the franchisor is to sell a franchise, and the extent of the franchisee’s business experience or financial backing. Regardless of your level of business experience, when purchasing a franchise, it helps to have an attorney experienced in franchise sales representing your interests. Please contact Einbinder & Dunn if you have any questions.
Q. What is Einbinder & Dunn's experience in representing franchisees?
A. Einbinder & Dunn counsels franchisee clients in all legal matters related to franchising. This includes transactional matters and dispute resolution (e.g., litigation, arbitration, and mediation) as well as business formation. The firm calls upon its unique and extensive experience representing both franchisors and franchisees to advise its franchisee clients on minimizing the risks associated with franchising.
For franchisee business formations, Einbinder & Dunn will create/structure the franchisee entity and prepare all relevant agreements. The firm also reviews all disclosure documents and franchise agreements, negotiates with franchisors to obtain the most favorable terms, and advises its clients in the negotiation of existing franchise agreement renewals. Einbinder & Dunn also drafts agreements with third parties, including independent contractor, supplier, employment, confidentiality and non-compete agreements. With vast experience in the area of real estate law, the firm represents franchisees in all real estate matters as well, reviewing and negotiating purchase agreements and leases, and resolving environmental and building code matters issues.
Einbinder & Dunn represents franchisees in disputes with franchisors in state and federal courts nationwide as well as in arbitration and mediation venues.
The firm has brought affirmative claims concerning franchisor earnings misrepresentations, misappropriation of advertising and rebate funds, and all manner of franchisors' breaches of franchise agreements (e.g., 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. The firm defends its franchisee clients against all claims, including claims of systems standards violations, failures to remodel/refurbish and trademark infringement/unfair competition. The firm has also counterclaimed on behalf of franchisee clients alleging illegal discrimination and inequitable treatment of franchisors in violation of federal civil rights protection statutes.
Recognizing the need to offer the most effective, cost-efficient solutions, Einbinder & Dunn provides arbitration and mediation services for its clients when the need for alternative dispute resolution methods is deemed appropriate.
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For questions or additional information about Einbinder & Dunn's franchise law services, please contact Einbinder & Dunn by clicking here to fill out a contact form or by calling 866-490-4909 or 212-391-9500 to speak with one of the firm's partners.