MSN Law Office

Franchising
Columbus, Ohio

Letters of Intent
Due Diligence
Asset Purchase Agreements
Stock/Membership Interest Purchase Agreements
Deal Financing
Buy-Sell Agreements
Merger Agreements
Franchising
      Franchise Disclosure Documents
      Franchise Agreements
      Business Opportunity Plans

Business Acquisitions

PRACTICE AREAS

Franchising

What is a franchise?
A franchise is any type of business relationship in which the seller (franchisor):

  1. Promises to provide a trademark (which might apply to the business itself or to the goods and services being sold);
  2. Promises to exercise significant control or provide significant assistance in the operation of the business (i.e., location selection, mandatory training, operations manuals, etc.); and
  3. Requires payment of at least $615 prior to or during the first six months of operations. This payment can be for almost anything the franchisor requires, though amounts spent on inventory are generally excluded. Also excluded are promises to make payments after the 6-month mark.


It does not matter what the parties choose to call their business relationship. If it looks like a franchise, it will most likely be regulated like a franchise. It also doesn’t matter whether the seller can actually fulfill its promises. We’ve seen a surprising number of business owners attempt to offer franchise relationships without significant control over their trademarks or the actual means to offer assistance to a franchisee.

Some business relationships that may not quite meet the elements of a franchise are also regulated by state laws addressing business opportunities. Others, such as one-on-one licensing agreements, may meet each of the elements above, but the law does not regulate such agreements as franchises. In addition, like most areas of the law, there are several exceptions that may apply to your particular business operations, including fractional franchises, leased departments, large franchises, and insiders, among other exemptions. And there are variations in the laws of different states that can also impact whether a particular business relationship is a franchise or not.

What steps are involved in franchising a business?
Franchising a business requires meeting complex legal requirements at both the federal and state levels.

  • Because of the additional legal risks associated with franchising, most companies that offer franchises separate their current business operations from their franchise operations by forming a new business entity.
  • If you haven’t already, you should also register the trademarks that will be offered to franchisees.
  • The franchisor is required to issue a franchise disclosure document (which must also be registered and approved in some states). The FDD must be provided to prospective franchisees at least 14 calendar days before the prospective franchisee signs a binding agreement or pays any money to the franchisor.


In addition to the legal steps, you should also prepare an operations manual for training new franchisees, as well as a business plan detailing how you will market and sell your franchise.

What should I consider before buying a franchise? 
Before purchasing a franchise, you should carefully review both the FDD and the franchise agreement. These documents contain important information designed to make sure prospective franchisees aren’t being deceived or misled.

  • What fees will you be required to pay, both initially and throughout the relationship? Typically, you will be required to pay an initial franchising fee, ongoing royalty fees, and transfer fees if you ever sell or transfer your franchise to a third party. You may also be required to participate in a marketing fund, pay for the costs of mandatory technology or equipment, and pay to attend mandatory training sessions and meetings. Then there are the hidden costs associated with being a franchisee. For example, what situations might require you to indemnify the franchisor? Will the franchisor shift the costs of an audit onto you? Can you be assessed late fees or interest? Is there a fee associated with the franchisor stepping in to manage your franchise, either because you cannot or because you are not meeting the franchisor’s requirements)? How much insurance will you be required to carry?
  • What is the extent of the territory you are being granted? When can the franchisor make sales in your territory? It’s not unusual for franchisors to retain the right to make internet sales in your territory or to operate locations within “non-traditional” locations such as airports, stadiums, and arenas, military bases, hospitals, or schools. Can the franchisor operate other competing businesses in your territory? 
  • To what extent will you be bound by a non-compete provision, both during and after the franchise relationship? 
  • What happens at the end of the term? How easy will it be to renew the franchise agreement? Will you be required to sign the latest version of the franchise agreement (which might mean higher fees, a smaller territory, or other more onerous restrictions)? Will you be required to remodel, update, or renovate your franchise location to meet updated requirements? Will the franchisor charge a renewal fee?
  • What will happen when you decide to exit the franchise business? Selling a franchise is significantly more complicated than other business sales. The buyer will have to be approved by the franchisor and agree to the latest version of the franchise agreement. As the seller, you will likely be assessed a transfer fee. You will also be required to sign a release (a promise not to sue the franchisor for anything that may have happened while you were a franchise). 
  • Under what circumstances can the franchisor terminate your franchise agreement? Will you have a reasonable opportunity to cure any issues that arise? How much do you stand to lose if the franchise agreement is terminated? 
  • What are the dispute resolution provisions? What state laws govern the relationship? Will you be dragged into court out of state (and have to look for legal counsel out of state)? Are there limitations on the amount of damages you might be able to recover? Are you giving up your right to a trial by jury or to participate in a class action? In the event of a dispute, will you be required to pay the franchisor’s legal fees? 
  • What are you required to purchase? It’s not unusual for a franchisor to require its franchisees to purchase inventory, equipment, and other supplies directly from the franchisor, its affiliates, or a select group of approved vendors. Those terms may not necessarily be favorable to you.
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Whether you are considering franchising your business or purchasing an existing franchise, it’s important to have sophisticated legal counsel to help you navigate these complex issues.