Franchise opportunities abound. More and more people are considering franchising as a means to expand their opportunities. An experienced franchise attorney can assist clients in avoiding the pitfalls that plague this arena. Mr. Kurtz assists his franchise clients in creating franchise programs and structuring franchise relationships that benefit all concerned.
- What is a franchise?
- What types of franchises can be offered?
- Does it make sense to franchise my business?
- How do I determine if this is a Franchise?
- What is a Franchise Disclosure Document (FDD)?
- What information does a FDD contain?
- What happens if I sell a franchise without publishing the FDD or registering it, if required?
- How can a franchisor avoid litigation and other legal issues?
- What obligations do I have to my Franchisees?
- What is Barry Kurtz's experience in representing franchisors?
Franchising is a method of expanding a business where the franchisor licenses its trademark and business system in exchange for payment to the franchisor for the right to operate the franchise using the business system and trademark. Business is then conducted in accordance with the franchisor's standards and specifications. Franchisors generally provide franchisees with pre-opening training, post-opening training and overall support along with the right to use the franchisor’s trademark and system.
Franchises generally fall into two categories. They either operate in the retail sector or in any of the service industries. For retail franchises, franchisors may offer anything from full retail store franchises to kiosk franchises. Service franchises offer a full array of services. The types of franchises that may be offered are as unique as the particular business model developed by the franchisor.
An individual buys a franchise because they believe that they have a better chance of success than starting a business from scratch. The franchisee expects that the franchise owner (you) will increase their odds for success. In considering whether or not to franchise your business, consider the following:
- Is your business financially successful?
- Is it easy for someone else to acquire the skills necessary to operate and promote this business?
- Is your industry growing or stable?
- Do you have experience in operating multiple locations?
- Is the franchise easily fundable? Can the buyer obtain funding from commonly available sources?
- What, precisely, are you offering the buyer? Will you still have something to offer once their business has been in operation for a while?
- Is there a sufficient profit margin in this business to profitably support the franchisee and to pay you a franchising royalty?
If the answer is yes to all of these, your next step should be to contact a reputable franchise lawyer.
A franchise requires three key elements:
- Unifying name or mark
One of the parties (the Franchisor) gives the other (the Franchisee) the right to operate a business in association with the Franchisor’s trade name, trademark, service mark, or logo. Customers are given the understanding that the franchisee belongs to a chain or association of businesses which are associated with this name or mark.
- Business assistance or control
The Franchisee must operate their business in accordance with the franchisor’s business system and marketing. The Franchisor has substantial control over the manner in which the Franchisee operates its business.
- Franchise Fee
The Franchisee pays the Franchisor for the rights described above.
The Federal Trade Commission (FTC) governs franchising. The FTC Rule requires that franchisors provide potential franchisees with a Franchise Disclosure Document (FDD). Before a franchisor is legally permitted to sell a franchise, the franchisor must comply with certain rules by the 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 information for the franchisee to use to make an informed decision about 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 provide the UFOC to each potential franchisee. In 2007, the FTC revised its rule on franchising. Franchisors were permitted to use the UFOC format until June 30, 2008. As of July 1, 2008, all franchisors must use the FDD format.
The Franchise Rule states what must be disclosed and provides its own disclosure format. It is published in the Code of Federal Regulations, Volume 16, Part 436 (16 CFR § 436), which may be found by link to the following page: www.ftc.gov/ftc/legal.htm.
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 items of information contained in the FDD are the history of the franchisor and its founders, information about 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 also details the size and scope of the territory granted to the franchisee and will discuss the rights retained by the franchisor. Franchisors may choose to disclose information relating to the financial performance of the franchise system or franchisees operating within the system.
You can also find the current state and federal guidelines in the Business Franchise Guide, published by Commerce Clearing House, Inc., in many law libraries.
In states such as California, Hawaii, Illinois, Indiana, Maryland, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, or Washington, the FDD must be reviewed and approved by the appropriate state agency. Some states require compliance with additional state laws as well.
Numerous fines and penalties may be imposed if you sell a franchise without an FDD or fail to register an FDD in a registration state or fail to file the proper paperwork in states that require filing before selling in that state. You may be subject to liability under both federal laws and state statutes. In addition, if you sell a franchise in violation of federal laws or state statutes, you are exposed to franchisee initiated lawsuits for liability to your franchisees for any losses they may incur in the operation of their franchise business.
As laws change from state to state, it is imperative to have wise, experienced counsel from a competent franchise lawyer.
Exposure to litigation or other legal risks is minimized by complying with all applicable statutory requirements, including federal laws and state statutes. Additionally, your FDD and all related agreements should be drafted with a view toward clearly stating the rights of the franchisor and the franchisee in order to avoid any confusion. All documents should be clear and written to provide the franchisor with the maximum amount of protection possible.
Franchisors need to train franchisees how to operate the business and provide detailed operating manuals. Franchisors generally provide support from ongoing training to administrative and technical support. Franchisees rely on the franchisor for guidance based on the franchisor's proven system.
Barry Kurtz has extensive experience representing both start-up and established franchisors in a wide variety of industries especially restaurant services, insurance, janitorial maintenance and others.. The firm assists franchisor clients with the development, registration, operation, restructuring and expansion of their businesses.
Barry Kurtz assists his franchisor clients on all matters relating to franchise law compliance, the preparation and registration of their FDD, developing their in-house compliance department, negotiating and closing the sale of franchises, and the franchisor-franchisee relationship.;