Franchising has proven to be a successful way to own and operate a business with the backing of an established brand. Compared to starting an independent business from scratch, franchisees basically gain access to nearly every aspect of the business model. “From the brand name, logo, and operational systems to trade secrets and marketing tools, you have essentially received the proven playbook for building a successful enterprise,” says Jason W. Power of Franchise.Law.
However, like any business, franchising comes with its own set of legal intricacies that every aspiring franchisee and franchisor should understand before signing on the dotted line. In this article, we will explain franchising and the legal principles it entails.
Table of Contents
What is Franchising?
For a franchisee, franchising involves owning and operating a business under another company’s name, logo, brand details, and operational models. As a franchisee, you have the legal right to use these business details without worrying about breaking the law. On the other hand, for a franchisor, franchising is a means of expanding your business.
This is achieved by allowing other individuals (franchisees) to open and operate new locations using their brand, systems, and business model. Instead of opening every store themselves, franchising allows them to expand beyond their expectations.
The Importance of the Law in Franchising
Franchising is more than just a business agreement; it is a relationship bound by the law. It is heavily regulated and structured to protect all parties involved in the process, especially the franchisee. Unlike informal partnerships, vendor agreements, or other business arrangements that may involve fewer legal obligations, franchising is governed by strict compliance with federal and state laws. There can be no compromises.
These laws protect the interests of both franchisors and franchisees, defining the rights and responsibilities of all parties involved. Also, it minimizes the risk of conflict by ensuring transparency, accountability, and legal alternatives when issues arise. In simple terms, a successful franchise relationship requires all parties to adhere to the law.
Requirements for Franchisors According to the Law
There are specific legal requirements that aspiring franchisors must meet before offering or selling a franchise. In addition to the Franchise Disclosure Document (FDD), these legal requirements include
- Registration and Compliance According to State Laws: Franchisors are required to register their franchise operations (offering or selling) with their state’s agency. Additionally, it is essential to note that each state has its own set of rules and regulations regarding franchising, including filing requirements, fees, and renewal procedures. Before proceeding with franchising, it is essential to familiarize yourself with the state’s rules and compliance agreement.
- Audited Financial Statements: It is expected that franchisors will provide their financial statements, not just ordinary ones, but ones that have been thoroughly audited and reviewed by an independent auditor.
- Honest and Transparent Marketing: Franchisors are legally obligated to ensure their advertising and promotional materials are accurate and not misleading. Any financial projections or earnings claims must be supported by documented evidence and properly disclosed in the FDD.
Franchisee Rights and Obligations under the Law
Under the law, franchisees have specific rights and obligations that have been established to protect their investment and ensure fairness within the franchise system. These include:
- Right to Full Disclosure: Franchisees are entitled to receive the Franchise Disclosure Document (FDD), which provides them with the opportunity to review key information about the franchisor, the franchise system, and the associated legal and financial obligations. Under the law, this disclosure must be received at least 14 days before the contract is signed.
- Right to Training and Support: Franchisors are legally required to provide initial training and ongoing support as promised in the agreement.
- Right to Use the Brand: Upon signing the agreement, the franchisee gains the right to operate under the franchisor’s established brand, trademarks, and business model.
- Compliance with Local Laws: In addition to the franchise agreement, franchisees are obligated to comply with all applicable local, state, and federal laws. These laws include health and safety codes, taxation obligations, labor laws, and employment practices.
- Financial Obligations: Franchisees are legally obligated to comply with all payments outlined in the contract. Missing a payment is akin to breaking the law.
Conclusion
Franchising offers a big and satisfying opportunity, but with legal complexities. If you are new to franchising, it’s crucial to conduct thorough research, understand the fine print, and never underestimate the value of legal advice.
