Franchise laws in the U.S. vary by state. You need to be sure you are in compliance with local franchising laws when you consider opening a franchise, especially if it’s a franchise that runs in different states – you may run into some difficulties when trying to open in your area. In the U.S., the Federal Trade Commission (FTC) is the regulatory government body in charge of franchising deals. State laws will affect sale offers within a particular state.
There are three defining characters of a franchise: trademark, significant control or assistance, and required payments. The FTC will consider your business as a franchise if it satisfies all of these components.
- Trademark – Be it a logo, service mark, product, and any other commercial devices, franchisees will acquire the right to distribute goods and services with the franchise’s trademark to the market.
- Significant control or assistance – this is a complicated element of the franchise. The franchisor has much of the control with the franchisee’s operations. Quality control is strictly implemented to ensure that products and services are up to acceptable standards. This would include site approval, structural design, employee training, product output, accounting practices, price range, and much more.
- Required payment – a franchisee is required to make payments to the franchise owner or their affiliates. The sum can also be referred to as ‘royalties’. In exchange for the use of a franchisor’s trademarks and control or assistance, a franchisee is required to make royalty payments to sustain the right to use it.
Regulations set by the FTC require that be a disclosure of information for licensing, contacting, advertising, sales, and promotions of the franchise. Common disagreements that occur between the franchisor and franchisee include:
- Franchisor’s trademark
- Terms of the franchise agreement – terminating, selling, or modifying the contract
- Business experience of its officers and directors
- If the franchisor has a fictitious name
- If the franchisor, officer, or directors have been involved in cases of fraud
Franchise agreements are binding contracts. They will state the obligations and rights between the franchisor and its franchisee. Franchising is basically the duplication of a business, its products and services must be consistent and standardized. This enforces the franchisor’s brand identity. Franchisors are often very protective of their brand so they have the right to dictate issues indicated within agreements. A franchisee will also want to have some rights over the brand and may have concerns of their own. This is why franchise lawyers are often used to review the contract and mediate between the parties. They also ensure the legality of the franchise agreement.
Franchises can be a profitable venture for both the franchisor and franchisee. It allows the franchisor to expand their business without selling it. To ensure that neither party is misinterpreted, a franchising lawyer is necessary for the transaction. An experienced franchise lawyer will separate the contract terms from acceptable obligations and point out anything that is extreme or unusual from the contract. They can help negotiate any changes that the franchisee or franchisor would like to make. A highly skilled franchise lawyer may even help you evaluate possible opportunities and assist in creating a business plan for the future. Do not get into a franchise agreement without at least having an experienced franchise lawyer review its contents.