What’s A Franchise Agreement?
Franchise agreements are legal documents between franchisor and franchisee or sub-franchisor and sub-franchisee that details the rights and obligations of the parties in conjunction with the franchise that is to be developed and operated. Franchise agreements typically cover the following topics: territory of operation, quality control, advertising fees, royalties, transfer of ownership, termination terms and conditions, and dispute resolution, among other provisions . Much like a marriage, if the franchisor and franchisee are not compatible, the franchisor will have a great deal of difficulty managing the brand as a whole and the relationship may dissolve or it may see the franchisee fail on the franchisor has no control over that business. A franchise agreement provides for the relationship between the franchisor and the franchisee should there be any issues.
The Purpose Of A Franchise Agreement Lawyer
A franchise agreement lawyer plays an integral role in the franchise development process. They are responsible for advising clients on all legal issues related to the franchise relationship and helping clients navigate from pre-sale and disclosure to post-sale support. While this can mean many things, it mostly amounts to the following:
- Structuring and Drafting – A franchise agreement lawyer will help in structuring and drafting the franchise agreement and other supporting documents (if applicable). This may include proposing franchise fee structures, royalties, advertising funds, overcoming encroachment, territory issues, renewal rights, termination, and post-termination obligations. Additionally, a franchise agreement lawyer will help in drafting and implementing the policies and procedures manual.
- Reviewing – A franchise agreement lawyer will review existing franchise agreements for clients and help draft any changes that need to be implemented. This may include helping the franchisor find ways to better protect its interests, such as by redrafting provisions so that they will hold up in court.
- Negotiating – A franchise agreement lawyer can negotiated franchise agreements on behalf of franchisors and franchisees alike. They can also advise one client as to how to best proceed in negotiations with the other party.
- Properly Disclosing – Franchise agreement lawyers often help in filing disclosure documents with federal and state agencies to ensure that their franchisors are in compliance with all relevant franchise laws.
Key Components Found In A Franchise Agreement
Many Key Clauses in the Franchise Agreement Are of Interest to Your Franchise Agreement Lawyer
This part of a franchise agreement describes the brand’s intellectual property and how it may be used. This is very important for both the franchise brand company and the franchisee, since the brand is the sum of all the good work that has gone into building the brand name and getting customers to trust it and buy its products or services. To protect itself, the franchisor usually requires that the franchisee not disclose any proprietary information, not use the brand name or trademarks except as allowed in the agreement, not allow the materials to be used by others in a business that is not franchised and not use the branding materials after the agreement has been terminated. The franchisor also reserves the right to revise the products or services to keep them up to date and to revise the rights to use them if necessary, with little input from the franchisee.
The list of fees included in the franchise agreement is often in the opening paragraphs or pages, but it is common to have several sections on fee payments, including when they are due, whether they are payable to the franchisor or an affiliated entity, and what counts as gross sales revenue. Some fees are based upon gross revenues, a few are based upon specific number of units sold or royalties and others are flat fees for things such as training classes, advertising or document preparation. A monthly payment plan is often used, but with semiannual or quarterly reconciliations to account for adjustments, such as credits for returns or defective products. It is very important for the franchisee to understand what they are paying for and what will happen if they don’t pay their fees on time.
If you mention a territory to a franchise lawyer, he or she will suddenly perk up and become very focused on that part of the agreement. There are several types of territories and each has pros or cons for both the franchisor and the franchisee. An exclusive, defined territory, for example, means that the franchisor can’t sell any other franchises in that territory while the agreement is valid. However, it also means that the fringe locations, locations that are not your major target or where you don’t want to invest in a marketing effort, cannot be sold to another franchisee. There are many variations on this type of territory and some groups are licensed with large defined territories, but with the right to operate in only a few. Sometimes the territory is defined as a certain distance or time from your location, like 200 miles or two hours. While this gives almost an unlimited area to work with, it also allows the franchisor to sell several franchises within your territory. If it is larger than you expected and contains key locations that you would like to run, you have already lost something.
These clauses give the franchisor the right to terminate or to not renew the agreement under certain conditions, like not paying fees or not keeping up the required standards. Franchisors are often hesitant to specify conditions, because they want the right at their discretion to terminate the agreement for almost any reason that tends to harm the brand. Unfortunately, unscrupulous or poorly managed franchise brands have used vague language to terminate an agreement, so laws now require that the termination conditions be clearly identified. The franchisor may specify whether they have to give you a chance to repair the conditions or whether they can terminate "at will." One daily discounted coupon franchise chain always ended their agreements because the location didn’t get enough sales, a main condition of the agreement on which the franchisee was allowed to rely.
Why Hire A Franchise Agreement Lawyer?
A franchise contract is an extensive legal document that lays the groundwork for the future of a franchised business. It determines how two businesses in a franchised relationship will work together. A franchise agreement has all sorts of stipulations, clauses, terms , and stipulations that affect how important decisions are made and how each party in the relationship feels about the way certain things are handled.
It’s not uncommon for unintended negative consequences to occur as a result of not hiring a franchise contract lawyer. An experienced franchising attorney can help prevent negative outcomes. An experienced franchising lawyer will actually be able to help you avoid or minimize many of the legal risks associated with entering into a franchise agreement.
Some of the benefits of hiring an experienced franchise agreement lawyer include:
- They can help you negotiate favorable terms when you are entering a franchise agreement.
- They can help you protect your own interests if the current franchisor is involved in a dispute with another franchisee.
- They can help you better manage your franchise by explaining issues that may come up through the life of the agreement.
- They can help you understand the complex legal documents that are typically involved in a franchise contract.
- They can help you understand how a franchisee is required to operate its business, including what tools it can and cannot use.
Tips For Choosing A Franchise Agreement Lawyer
The selection of a franchise agreement lawyer from the very outset can be a pivotal decision in the long-term success of your franchise. Finding a qualified and experienced attorney to guide you with your purchase of a franchise agreement is arguably the most important step in the acquisition process. Without proper guidance by a skilled franchise agreement attorney, your interests may not be adequately protected and you may be subject to more of the risk that comes along with purchasing a new franchise.
If you are going to invest the money and time to purchase a franchise, you want to get every ounce of value out the system you are purchasing. This starts long before you sign a contract with a franchise company. Before you choose to invest in a particular franchise system, you have to know that you will be supported by the franchisor, if you need assistance or have an issue as a new franchisee. A few simple steps to finding a qualified franchise agreement lawyer can help you understand the franchise laws, the franchise disclosure document and processes necessary to protect your interests when it comes to a franchisor.
Always, without fail, check their reviews and ratings. Online reviews can play a critical role in the selection of a franchise agreement lawyer. If prior clients maintain a consistent opinion about the lawyer’s skills, you can be assured of their confidence. But always check more than one site. Even false reviews are not uncommon, and finding a common theme can help inform your eventual decision.
In addition to checking reviews, research the attorney’s credentials, primarily with their state bar association. All lawyers are required to maintain certain standards to keep practicing law. However, some may allow their licenses to lapse, putting the credibility of their practice in question. Checking their status is simple, you can search the state bar website to see whether or not the specific attorney has ever had their license suspended, whether they have been publicly sanctioned or whether they have been sued for malpractice or disbarred entirely.
There are approximately 3,000 franchise systems operating in the United States, and that number is growing. The law around these businesses can be very complicated, but an experienced lawyer should be able to properly address your specific needs, regardless of the industry. When considering hiring a franchise agreement lawyer, ask them about their experience, particularly in respect to the franchise you are purchasing. If, for example, you are purchasing a pizza franchise, they should be able to properly identify any issues you may encounter with the franchisor of that type of franchise.
For any new business owner, hiring a franchise law firm is an unavoidable expense that must be done to protect your rights. However, finding quality representation does not have to be difficult or time consuming. If you follow these three simple steps, you should be able to find the right franchise agreement lawyer that fits your needs.
Basic Mistakes Found In Franchise Agreements
One of the most common mistakes that people make when they enter into a franchise agreement is not fully understanding the contract terms. Some people may think that it is fine to sign a contract without fully reading it, but doing so can be a huge mistake if there are unseen legal for fees and other surprises in the fine print. This is a mistake that an experienced franchise agreement attorney could help you avoid.
A typical error that a person makes with a franchise agreement is underestimating costs. In many cases, there are different fees out there such as a franchisee fee, startup costs, deposit and royalty payments. For someone spending a lot of money on a franchise , not knowing all of the costs could leave the person with a surprise bill.
Another common mistake that a person could make with a franchise agreement is not fully complying with the legal requirements. Some franchises require owners to meet certain regulations, such as completing a course or having the ability to run the business. An experienced lawyer understands the legal requirements of certain franchises.
By avoiding some of these common mistakes through the direction of an experienced attorney, a person could make it easier to understand the franchise agreement that they are entering and seek out issues before they become actual legal issues.