Whether you are seeking to franchise your business as a franchisor or purchase a company as a franchisee, you deserve to understand your legal rights and responsibilities. Massachusetts does not have franchise registration and disclosure laws, but an important federal regulation governs these operations within the state. There are also non-legal considerations that both franchisees and franchisors need to understand before embarking on the franchise route. Our seasoned franchise law attorneys have considerable experience with franchises, both from a business and legal perspective. Franchisees and franchisors alike count on us to provide sound legal counsel to assist them with diverse matters affecting franchises.
The Basics Of Franchise Law
If you’ve successfully operated a business for some amount of time, you may be ready to franchise your operation. A franchise is a relationship whereby one party (the franchisor) licenses its proprietary business products, processes, and intellectual property to another party (the franchisee) in exchange for certain fees and royalties. In essence, the franchisor sells the right to use its name, goods, and ideas to a franchisee.
Franchises offer a number of significant benefits to both the franchisee and franchisor. The franchisee, for instance, gains access to a reputable brand name in the form of products and services. Rather than having to spend money and time trying to establish one’s own reputation in a certain industry, an entrepreneur can use the established name of another business. This is especially useful in highly competitive industries like restaurants and fast food.
Meanwhile, the franchisor receives different types of payments from the franchisee. These may include:
- Upfront fee (which pays for access to intellectual property rights, such as trademarks or service marks)
- Payment for equipment, training, and consulting services
- Ongoing royalties or a percentage of sales
The franchise relationship is governed by a contract. This document can be exceedingly complex depending on the nature of the business. Franchisors are protective of their reputations and understandably want to ensure that franchisees do a good job representing their brands in the way they operate their businesses. Franchise agreements can therefore impose severe penalties on the franchisee for either breaching the agreement or prematurely ending it.
The agreement will often spell out so many things that it leaves little room for negotiation or discretion on the part of the franchisee. The more well-known a business is, the more likely that such items will be detailed in the franchise agreement:
- The products that must be sold
- The design and appearance of employee uniforms
- Layout of the store or business
- Approved suppliers
- Training and financing requirements
What Franchisors Need To Know
Massachusetts does not have a specific law governing franchise registration. But the Federal Trade Commission (FTC) does regulate these businesses. Before you franchise your operation, one of the first things you will need to understand is the FTC’s Franchise Rule. This regulation requires franchisors to provide certain disclosures to prospective franchisees. Known as the Franchise Disclosure Document, this disclosure will need to include the following (among other items):
- Restrictions on what the franchisee may sell
- Any geographical restrictions the franchisor is imposing on the franchisee
- Expenses and fees associated with operating the franchise
- History of litigation involving the franchise
- Approved suppliers and other vendors
- Expectations regarding business performance
More broadly, the franchisor will be interested in protecting its brand name and reputation, safeguarding its intellectual property rights, and ensuring that franchises are profitable (which translates into robust ongoing royalties). Our attorneys work with franchisors to help ensure these and other objectives are met in the form of the franchise agreement. We meticulously draft these agreements for franchisors and explain the obligations that both parties will have throughout the franchise relationship.
What Franchisees Need To Know
On the other side of this equation, the franchisee will generally want to ensure that he or she is buying into a viable business model. One of the most persistent complaints among franchisees is having to pay significant sums of money (upfront fees and royalties) in exchange for low value franchises. The due diligence process exists to reduce the likelihood of a potential franchisee purchasing a business that won’t live up to its promises.
If you decide to purchase the franchise, it will be of utmost importance to understand your obligations. Failure to adhere to the franchise agreement could spell significant legal penalties. But as mentioned above, you do have rights under the FTC’s Franchise Rule. We help franchisees understand and abide by their duties but also explain their legal protections and assert their rights if necessary.
Enforcing The Franchise Agreement
Both franchisors and franchisees may seek to enforce the franchise agreement. A franchisee may complain about the following:
- Misrepresentation of the value of the franchise
- Poor quality of the franchise products or services
- Excessive costs and fees
- The franchisor allowing competitors into the geographic territory
- Lack of business or marketing support from the franchisor
Conversely, the franchisor may want to enforce the agreement in cases in which the franchisee:
- Fails to make required payments
- Opens a competing business
- Disregards franchise policies and requirements
- Ignores product quality rules
- Takes steps to actively harm the brand or franchise reputation
Other Franchise Law Issues We Handle
For both the franchisee and franchisor, our law firm can also assist with the following:
- Termination of the franchise, including early termination for material breach of the franchise agreement
- Dispute resolution of franchisee-franchisor disagreements
- Franchise renewals and negotiations
- Transferring the franchise to another owner
- Mandatory arbitration and litigation
Contact Our Worcester Franchise Law Attorney
Competent legal counsel is a must, whether you are seeking to franchise your operation or purchase a franchise of your own. SederLaw represents both franchisors and franchisees at all stages of starting and acquiring franchises, including litigation and alternative dispute resolution. Put our experience to work today by calling to schedule your confidential consultation.