The Legal Aspects of Franchising Worth Paying Attention To

If you have ever dreamed of owning a business but don’t want to start from scratch, franchising sounds like a dream come true. You gain a recognizable brand name, a built-in customer base, and a proven blueprint that has been successfully implemented. What could go wrong? Well, plenty, if you overlook the legal side of things.

“Franchising may come wrapped in a shiny bow, but make no mistake: it can be a legally complex relationship,” says franchise attorney Jason W. Power of Franchise.Law. If you ignore the fine print, that dream can quickly turn into a financial and emotional nightmare. Here are the key legal aspects that franchisors and aspiring franchisees should be aware of:

The Franchise Disclosure Document

The Franchise Disclosure Document (FDD) serves as the legal roadmap for franchising, marking the beginning of the legal relationship. It is the required legal document in the U.S. and other jurisdictions that the franchisor must provide to potential franchisees. It is designed to ensure transparency and must be submitted at least 14 days before the signing of any agreements. The FDD contains 23 key items, covering aspects such as the franchisor's litigation history, the management team, fees, territory rights, and information on current and former franchisees.

You should carefully and thoroughly review the FDD with the assistance of a franchise attorney. Ask questions, especially if the franchisor has a long list of lawsuits or settlements. You should note that while the FDD is standardized in structure, every franchisor’s document is different in substance.

The Franchise Agreement

While the FDD provides disclosure, the franchise agreement is the actual agreement that shows the relationship between the franchisor and franchisee has been sealed. The agreement outlines the rights, protections, fees, obligations, restrictions, and penalties for non-compliance for each party. Key areas worth paying close attention to include territorial exclusivity and rights, renewal terms, termination and default, and non-compete clauses.

Once signed, each party is legally bound to the contract for years, depending on the terms. It is worth noting that most franchise agreements heavily favor the franchisor. This is not necessarily predatory; it is often to protect the brand’s integrity. You should always review the agreement before signing it. Although these agreements tend to be non-negotiable, work with your attorney to check if specific terms can be negotiated.

Intellectual Property Rights

Intellectual property rights are a key aspect of the franchise agreement that you should carefully consider. One of the significant advantages of franchising is the opportunity to leverage an established brand. By joining the brand, you gain access to various benefits associated with it. These include the brand’s name, logo, slogans, trade secrets, proprietary recipes, operational systems, and marketing materials.

However, it is essential to note that as a franchisee, you do not automatically own any intellectual property rights, as they remain the exclusive property of the franchisor. You are only getting the license to use it. The franchise agreement clearly outlines the scope and limitations of this license.

Dispute Resolution Mechanisms

Disagreements and disputes are inevitable, which is why dispute resolution clauses are included in every franchise system. The dispute resolution clause in your franchise agreement can limit your legal options later, so it is wise to pay attention to it before signing. Franchisors chose to use arbitration or mediation as an alternative dispute resolution mechanism. However, many franchise agreements utilize the arbitration method to resolve disputes because it is faster, more confidential, and can be resolved outside of the court system.

You should note that as a franchisee, you typically do not have the option to change these terms. Review the dispute section and carefully examine how disputes are addressed in the franchise agreement.

Conclusion

Franchising can be a rewarding path to business ownership, but it is not without its legal challenges. Do not approach franchising with rose-tinted glasses. Approach it with open eyes, work with legal professionals, and scrutinize the fine print. In franchising, what you do not know, or choose to ignore, can hurt you in the long run.