Franchising
The decision to franchise your business represents years of hard work in building your brand and the acknowledgment from a potential franchisee that your brand is a valuable asset. With decades of experience in the field the attorneys at Petock & Petock, LLC are ready to advise you with respect to your franchise.
Franchise Agreements:
The franchise agreement is the document that will define the franchisor/franchisee relationship. This document should clearly identify the rights and obligations of the parties. Failure of franchisees to operate the business in accordance with quality standards, for example, can not only hurt the brand from a marketing standpoint but can also have a negative legal effect on your trademark or service mark and on the your franchise system as a whole. Franchise agreements commonly contain provisions related to franchise fees and royalties, training and ongoing support of the franchisee, advertising requirements, term and termination provisions, territory and, of course, intellectual property rights. There is no one form of agreement that will suit the needs of all franchises- a franchise agreement should be drafted with the unique needs of the particular business in mind. Other contracts and agreements commonly part of the franchise package include leases, options, financing and purchasing agreements.
Disclosure Requirements
Franchising is regulated by both federal and state law. Franchisors are required by the Federal Trade Commission to comply with its Trade Regulation Rule entitled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” (the “Franchise Rule”). The original Franchise Rule was promulgated in 1976 in response to evidence of widespread deception in the sale of franchises through misrepresentations and nondisclosures of material facts by franchisors to potential franchisees. The Franchise Rule was amended in 2007. The Franchise Rule and particularly its presale disclosure requirements is a cost-effective way to provide material information to prospective franchisees about the costs, benefits and potential legal and financial risks associated with entering into a franchise relationship. Unless exempted, a franchisor must provide information concerning the following 23 subject areas to a potential franchisee at least 14 days before the prospective franchisee signs a binding agreement with, or makes payment to, the franchisor or an affiliate in connection with the franchise sale:
1. Background information about the franchisor;
2. Business experience of the franchisor;
3. Litigation history involving the franchisor;
4. Bankruptcy history of the franchisor;
5. “Initial fees” required from the franchisee;
6. Other fees such as royalties, advertising fees and transfer fees required from the franchisee;
7. The estimated initial investment of the franchisee;
8. Any restrictions placed on the franchisee as to the sources of products or services;
9. A list of the franchisee’s obligations with respect to the franchise;
10. The material terms and conditions of any financing arrangements;
11. The franchisor’s obligations under the franchisee agreement to furnish assistance and training to the franchisee and any mandatory computer or software purchases and the related costs that a franchisee will incur;
12. The territory and applicable sales restrictions of the franchisee’s business;
13. Information about the franchised business’ trademarks including whether they are registered;
14. Information about other intellectual property of the franchise (i.e. patents, copyrights and trade secrets), ownership rights or licenses in the IP , legal proceedings and settlements involving the IP and restrictions that may impact the franchisee’s ability to use the IP;
15. Any obligation of the franchisee to participate personally in the direct operation of the franchise;
16. Any restrictions relating to the goods or services the franchisee will be allowed to sell;
17. A summary of the provisions dealing with termination, renewal and dispute resolution;
18. Information regarding any public figure’s involvement in the franchise system;
19. Certain required language relating to financial performance (representations about actual financial performance are permitted to be included in the disclosure document if there is a reasonable basis for the information);
20. Statistics and other information regarding franchised and company owned outlets and contact information for current (and former) franchisees;
21. Copies of financial statements audited in accordance with generally accepted accounting principles;
22. A copy of all of the proposed agreements relating to the franchise offering;
23.
A receipt to be signed by the prospective franchisee acknowledging receipt of the disclosure document. In general the required disclosure document is intended to give potential franchisees sufficient information to make an educated decision respecting their decision to invest in a franchise. The goal in franchising should not just be to franchise your business but should be to franchise your business to the best possible candidate. A professionally prepared disclosure document is key to attracting the best franchisees.
Franchisees:
Most franchisee agreements contain provisions that will create obligations of the franchisee lasting years into the future. Franchisees should be aware of language in agreements such as “No Royalties” or other provisions that seem too good to be true because they usually are. It is highly advisable that before a would-be franchisee makes the potentially life-changing decision to take on a franchise that they have the disclosure documents, franchise agreement and the underlying franchised business reviewed by professionals experienced with franchises including by an accountant and an experienced attorney. Petock & Petock is ready to meet with you to discuss your new business venture.
