Franchising involves the granting of rights to operate a certain business (along with associated intellectual property such as trademarks) to franchisees of a business where the Franchisor controls specific operating standards and branding considerations. Primarily due to the complexity of this relationships between Franchisors and Franchisees (as well as complex federal and state regulation), businesses considering franchising their concept should consult with an experienced franchise attorney. Sawan PLLC helps franchises with contracts, business transactions, regulatory compliance such as franchise disclosure documents and operating franchise companies. To schedule a free initial consultation to discuss your franchise, call 419-469-5002.
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The hallmark of the franchising relationship is the franchise agreement. This agreement will govern a variety of aspects of the relationship between the franchisor and franchisee. For example, it includes the license of intellectual property, fees and costs involved for the right to franchise, operating standards, training standards, and a wide range of other provisions. Ultimately, there’s a considerable amount of flexibility to draft a contract that accommodates unique franchise concepts. All franchisees operating units will have some kind of franchise agreement in place. Depending on the state where the franchise location is located, regulations pertaining to franchise agreements may differ. The traditional contracts law principles will, of course, apply to franchise agreements. There are many other parts of the franchising relationship that should be included in a franchise agreement as well. Given the wide range of different types of franchises, however, it is best to speak with an experienced franchise lawyer about the particular business involved for more information.
Franchise Disclosure Documents
The Federal Trade Commission (“FTC”) is a consumer protection agency that governs the rules regarding the offering, sale and marketing of franchise opportunities. The FTC’s goal with franchise regulation is primarily to make sure that perspective franchisees are fully aware of all the information that they should know before investing. One of the most important documents involved in franchise law is the Franchise Disclosure Document (“FDD”). This document is required in most cases by franchisors and must be provided to prospective franchisees according to strict rules and regulations. The FDD requirement is there to ensure that when prospective franchisees are buying a franchise, that they have a plain English disclosure about a variety of highly relevant considerations that regulators have determined should be considered before buying a franchise. For example, the FDD requirements include disclosures regarding litigation history, performance, operating standards, each provision of any contracts, and more depending on the franchise. The FDD is a document where all of this information is to be disclosed and it must be provided to prospective franchisees within a specific timeframe associated with the transaction. Before entering into the franchise agreement, the FDD has to have been transmitted and reviewed by the prospective franchisee. This regulatory requirement makes the FDD incredibly important when it comes to signing franchise agreements and renewing them.
A lot of prospective franchisees look to buy a franchise and enjoy brand recognition, training, certain business know how and other aspects of business operations that are well established under a typical franchising business model. While there’s certainly no guarantee of success in any business, a typical franchise has a track record, and a brand that other franchisees and the franchisor have invested in. Because the business has already been started and some performance results can be analyzed, many investors prefer the franchise model as opposed to starting a business from scratch. One of the key parts of the franchise disclosure rules is cost transparency. The disclosures should clearly answer in plain English how much it costs to start and operate a franchise. There are a variety of costs involved in operating a franchise. These might involve franchise fees, royalties, and advertising on top of the costs to operate the franchise location. There are also typically costs involved with any individual franchise unique to that business. That’s why selling a franchise often requires a detailed disclosure of each and every cost included in the FDD. As with any investment or business, it is important to very carefully review the costs disclosed to you if you are investing in a franchise. If you are selling a franchise, it is very important to include full disclosures of the costs and evaluate the costs on a periodic basis to make sure each annual FDD is as accurate as possible. After all, the franchise agreement is a contract. Just as with any investment, it is important to evaluate your financial condition before investing in a franchise.