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Legal Issues For Franchisees

There are many costs and benefits to becoming a franchisee. You may face less risk when your business is based on a successful, established brand that provides a game plan and support. However, the initial investment may be sizable, and you may make many commitments that could be difficult to live up to over time as a business litigation lawyer can explain.

What Is A Franchise? Who Are Franchisees And Franchisors?

A franchise is a license granting a franchisee (the entity running the local business) access to proprietary business knowledge, trademarks, and processes. The entity granting these rights is the franchisor. The license allows the franchisee to sell a service or product under the franchisor’s business name. In exchange, the franchisee pays the franchisor a start-up fee and annual fees.

Know What You’re Getting Yourself Into 

The franchise disclosure document provides detailed information about the franchisor and the opportunity according to Focus Law LA. It covers the franchisor’s background, the initial investment, ongoing fees, expenses, training, support, and the franchisee’s obligations.

Franchise Agreement

This is the contract spelling out the parties’ rights and obligations, including: 

  • The territory you’re granted
  • Period of time the contract’s in effect
  • The franchisor’s intellectual property rights
  • Marketing and advertising obligations
  • Termination and renewal rights
  • Dispute resolution 

Before signing you must understand the agreement’s terms and implications. Get help from an attorney who can explain your rights and obligations and may negotiate favorable changes for you.

Intellectual Property Rights 

Intellectual property (IP) rights define your use of the franchisor’s trademarks, trade secrets, copyrights, and patents, which you’ll need to establish your business and benefit from their brand recognition. You must grasp your rights and obligations. The agreement must provide protection and allow you to utilize the franchisor’s IP while guarding its integrity.

Resolving Disputes 

Disputes may arise between you and the franchisor. Franchise agreements typically include dispute resolution provisions outlining the preferred, if not mandatory, methods for resolving conflicts. Mediation, arbitration, and litigation might be options. 

Mediation involves a neutral third party who helps the parties end the conflict. Arbitration is a private trial of sorts overseen by an arbitrator (or a panel of arbitrators) who acts as a judge. Litigation involves lawsuits, nearly all of which are resolved through negotiation.

Financial Obligations 

Your financial obligations will go beyond your initial investment. You’ll probably need to pay ongoing royalty and marketing fees. You may need to contribute to a national advertising fund. Consider getting professional financial advice to evaluate your likely return on the investment you’ll need to make. Talking to a current franchisee may be time well spent.

Franchise Territories

You’ll have a defined geographic area with an exclusive or non-exclusive right to operate. If you have an exclusive territory, you’ll have the sole right to operate there. Other franchisees will be in a non-exclusive territory.

The nature of your territory is critical in evaluating whether there’s enough demand for your business, the potential competition, and your ability to establish and grow your business. 

Running a business involves many legal issues. As a franchisee, the franchise agreement and ongoing relationship with the franchisor add layers of legal complexity. Legal counsel can help you evaluate whether a franchise is right for you and, if so, help maintain a positive relationship.