Frequently Asked Questions
FREQUENTLY ASKED QUESTIONS FOR FRANCHISEES
The following information includes frequently asked franchise questions. The answers stated are general in nature and are not intended to apply to every situation. Each case is different and carries its own set of circumstances which must be taken into consideration by competent legal counsel. By contacting Einbinder & Dunn and speaking with one of our partners, you can receive a personal consultation regarding your specific legal claim.
Q. What is franchising?
A. Franchising is a method of expanding a business where the franchisor licenses its trademark and business system to a franchisee in exchange for payment to the franchisor for the right to operate the franchise using the business system and trademark. The franchisee then conducts its business in accordance with the franchisor's standards and specifications. Along with the right to use the franchisor's trademark and business system, franchisors will typically provide franchisees with pre-opening training, post-opening training and overall support.
Q. What are the advantages of franchising?
A. The advantages to purchasing a franchise rather than attempting to start your own business can be great. In part, purchasing a franchise means buying a proven business system. As a franchisee, you tap into the franchisor's knowledge of how to operate its business. This saves time that would normally be spent on development and cuts down on mistakes that are typical of young businesses. You also receive training to operate the business and ongoing support and assistance to help solve problems. In some instances, franchisors also create a national advertising program which benefits all franchisees by creating national exposure that would normally be impossible for new businesses.
Q. What types of franchises can be offered?
A. Generally, franchises fall into two categories. Franchises either operate in the retail sector or in any of the service industries. In each of these categories, a vast array of options exists in the types of franchises offered. For retail franchises, franchisors may offer anything from full retail store franchises to kiosk franchises to store-in-a-store franchises that offer all product lines, one product line or a combination of the product lines. Similarly, for service franchises, franchisees can offer a full assortment of services, one specific service or a combination of services. The types of franchises that may be offered are varied, each as unique as the particular business model developed by the franchisor.
Q. What is a Franchise Disclosure Document (FDD)?
A. Before a franchisor is legally permitted to sell a franchise, the franchisor must comply with certain rules promulgated by the Federal Trade Commission (FTC) and/or statutes enacted by the state the franchisor is selling from or the state the franchisor is selling into. The purpose of these rules and/or statutes is to require the franchisor to provide the potential franchisee with information for the franchisee to use to make an informed decision as to whether or not to purchase the franchise. The FTC Rule requires that franchisors provide potential franchisees with a Franchise Disclosure Document (FDD).
Q. What kind of information is in a FDD?
A. The FDD consists of 23 separate items of information and is intended to provide you with all of the material information concerning the franchise system that you will need to make an informed decision as to whether or not to purchase the franchise. Conceptually, the FDD is similar to a stock prospectus in that the purpose is to provide sufficient accurate information so that you can make an informed investment decision. Among the 23 items of information contained in the FDD, the franchisor must provide a history of the franchisor and its founders, information relating to the types of products offered under the franchise and the general condition of the marketplace for those types of goods, a description of the initial franchise fees and all other fees you will pay during the course of the franchise relationship, a description of the kinds of assistance the franchisor will supply to you, an explanation of the system standards for advertising development and placement, site selection and build out and computer systems. The FDD will also detail the size and scope of the territory granted to you and will discuss the rights retained by the franchisor. Additionally, franchisors may choose to disclose information relating to the financial performance of the franchise system or franchisees operating within the system.
Q. How do I find out about franchising opportunities?
A. If you know which franchise you are interested in, you can contact that franchisor, and they can tell you whether they have any franchising opportunities in your area. If you do not know which one you are interested in, you can look in newspapers or on the Internet, or you can attend franchising trade shows that are held from time to time. If that does not work, you can always contact a business broker. Buying a franchise from a franchisor is not your only option; you can also buy a franchise from an existing franchisee.
Q. How do I know if a franchisor is reputable?
A. You can never be sure, but a solid track record is one of the best indicators. In looking at potential franchisors, you want to deal only with franchisors that have an established reputation, enough capital to maintain the business into the future, products or services that are in demand and are of high quality, and satisfied franchisees. You can also try to find out if others have complained about the franchisor.
Q. How can I find out about complaints against a franchisor?
A. Consumer complaint records are kept by better business bureaus and other business regulators. Beware of franchisors that change their name and location. They may be doing so to avoid building up a record of complaints. To obtain information about consumer complaints, in addition to talking to your state's better business bureau, you can make a request in writing to the Federal Trade Commission in Washington, D.C. under the Freedom of Information Act. Make sure that you ask for complaints received nationwide, not just in your area.
Q. What steps should I take if I am interested in buying a franchise?
A. You should try to find out as much as you can about the company selling the franchise before making any commitments. Contact your state government to find out what filings and other information may be available. Disclosure statements and offering circulars are on file, but most states will not send them to you. You may have to go to their offices to review the documents.
Another source of information about the franchisor is other franchisees. The franchise disclosure rules require franchisors to include in their disclosures a list of the names, addresses and telephone numbers of at least 10 prior purchasers who are geographically closest to you. Talk to several franchisees and ask them about their experiences with the franchisor. They may not be willing to disclose their financials, but they will usually tell you about the state of their business relationship with the franchisor, which is valuable information.
Before any documents are signed, money is paid or the relationship is otherwise formalized, make sure that you discuss your franchising decision with an experienced franchise attorney, such as one of the partners at Einbinder & Dunn, who can help guide you through the process.
Q. What are the more common areas for dispute that arise during the franchisee-franchisor relationship?
A. Generally, a dispute between a franchisee and a franchisor involves one of seven common issues. The seven issues relate to termination of the franchisee and enforcement of the post-term obligations, statutory compliance issues, fraudulent practices, intellectual property matters, territorial encroachment and general contract disputes. Many termination cases are brought by the franchisee in response to an improper termination of the franchise by the franchisor. Disputes arising from the franchisor's failure to comply with registration, disclosure, relationship laws or other federal and state regulations are common. Also common are claims brought by the franchisee alleging fraud and misrepresentation by the franchisor, including fraudulent statements made by the franchisor relating to the franchisee's potential earnings (typically called earnings claims). Often, other disputes center around the franchisor's failure to comply with the franchise agreement in that the franchisor encroached on the franchisee's territory, failed to provide ongoing training and support or failed to comply with a number of other requirements imposed by the franchise agreement.
If you or someone you know needs the assistance or legal counsel of an experienced franchise lawyer, please call one of our partners at (866)715-2789 , or complete the contact form provided on this site to schedule your free initial consultation.
FREQUENTLY ASKED QUESTIONS FOR FRANCHISORS
The following information includes frequently asked franchise questions. The answers stated are general in nature and are not intended to apply to every situation. Each case is different and carries its own set of circumstances which must be taken into consideration by competent legal counsel. By contacting Einbinder & Dunn and speaking with one of our partners, you can receive a personal consultation regarding your specific legal claim.
Q. What is franchising?
A. Franchising is a method of expanding your business by licensing your trademark and business system to a franchisee who pays you a fee for the right to operate a franchise using your business system and your trademark. The franchisee shall conduct its business operations in accordance with standards and specifications you establish. Along with the right to use the franchisor's trademark and business system, franchisors will typically provide franchisees with pre-opening training, post-opening training and overall support.
Q. What are the advantages of franchising?
A. They are numerous. Because franchisees incur the costs of opening their own unit, franchising will allow you to expand your business without expending significant capital per unit. Keeping your costs low per unit reduces your risk while increasing the overall return on your investment. Franchising also allows you to grow your business on a much faster level than you would generally be able to do on your own. Additionally, not having to manage each unit on a day to day basis will allow you to devote more time to developing your brand and strengthening its presence in the marketplace. Many other advantages exist, including reducing your exposure to risks relating to signing leases, additional financing and vicarious liability for employee acts. If you are interested in franchising a business concept, please call one of our partners at Einbinder & Dunn or complete the contact form provided on this site to schedule your free initial consultation.
Q. What types of franchises can be offered?
A. Generally, franchises fall into two categories. Franchises either operate in the retail sector or in any of the service industries. In each of these categories, a vast array of options exists in the types of franchises offered. For retail franchises, franchisors may offer anything from full retail store franchises to kiosk franchises to store-in-a-store franchises that offer all product lines, one product line or a combination of the product lines. Similarly, for service franchises, franchisees can offer a full assortment of services, one specific service or a combination of services. The types of franchises that may be offered are varied, each as unique as the particular business model developed by the franchisor.
Q. What is a Franchise Disclosure Document (FDD)?
A. Before a franchisor is legally permitted to sell a franchise, the franchisor must comply with certain rules promulgated by the Federal Trade Commission (FTC) and/or statutes enacted by the state the franchisor is selling from or the state the franchisor is selling into. The purpose of these rules and/or statutes is to require the franchisor to provide the potential franchisee with information for the franchisee to use to make an informed decision as to whether or not to purchase the franchise. The FTC Rule requires that franchisors provide potential franchisees with a Franchise Disclosure Document (FDD).
Q. What kind of information is in a FDD?
A. The FDD consists of 23 separate items of information and is intended to provide the franchisee with all of the material information concerning the franchise system that the franchisee will need to make an informed decision as to whether or not to purchase the franchise. Conceptually, the FDD is similar to a stock prospectus in that the purpose is to provide sufficient accurate information so that the franchisee can make an informed investment decision. Among the 23 items of information contained in the FDD, the franchisor must provide a history of the franchisor and its founders, information relating to the types of products offered under the franchise and the general condition of the marketplace for those types of goods, a description of the initial franchise fees and all fees which are to be paid during the course of the franchise relationship, a description of the kinds of assistance the franchisor will supply to its franchisees, an explanation of the system standards for advertising development and placement, site selection and build out and computer systems. The FDD will also detail the size and scope of the territory granted to the franchisee and will discuss the rights retained by the franchisor. Additionally, franchisors may choose to disclose information relating to the financial performance of the franchise system or franchisees operating within the system.
Q. Are there legal requirements to selling my franchise?
A. Yes, there are legal requirements that you must follow. Before you may sell a franchise, you must prepare a FDD. Once you have prepared the FDD, you may be able to sell franchises in the majority of the states in the U.S., but you must comply with certain disclosure timing requirements relating to the dissemination of your FDD. In thirteen (13) states, franchisors are required to register their FDD before it can be disseminated to potential franchisees and used to sell a franchise in that state: California, Hawaii, Illinois, Indiana, Maryland, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. In addition to these thirteen (13) states, several other states require franchisors to file documents with that state or provide that state with notice before selling a franchise there.
Q. What happens if I sell a franchise without disseminating the FDD or registering it, if required?
A. Numerous fines and penalties may be imposed if you sell a franchise without using a FDD or fail to register your FDD in a registration state or fail to file the proper paperwork in states that require filing before selling in that state. Depending on the situation, you may be subject to liability under both federal laws and state statutes. Additionally, if you sell a franchise in violation of federal laws or state statutes, you will open the door for franchisee initiated lawsuits subjecting yourself to liability to your franchisees for any losses they may incur in the operation of their franchise business.
Q. When litigation does arise, what are the more common areas for dispute that arise during the franchisee-franchisor relationship?
A. Generally, a dispute between a franchisee and a franchisor involves one of eight common issues. The eight issues relate to (1) termination of the franchisee, (2) enforcement of the post-term obligations, (3) issues of vicarious liability, (4) statutory compliance issues, (5) fraudulent practices, (6) intellectual property matters, (7) territorial encroachment and (8) general contract disputes. Many cases involve matters arising after a franchise is terminated. Along with terminating the franchisee's relationship with the franchisor, it is vital to the health of the franchise system that the franchisee complies with its post-term obligations, including any non-competition and non-disclosure agreements. Vicarious liability is a legal term that in this context is used to describe where a claim against a franchisor is based on acts or omissions by the franchisee. Typically, a well-drafted franchise agreement would insulate franchisors from vicarious liability claims. Also common areas for dispute are claims relating to the franchisor's failure to comply with statutory requirements either because of violations of registration, disclosure, relationship laws or other federal and state regulations.
Q. How can a franchisor avoid litigation and other legal issues?
A. The best way to minimize exposure to litigation or other legal risks is to comply with all applicable statutory requirements, including federal laws and state statutes. Additionally, your FDD and all related agreements should be drafted with a view toward clearly stating the rights of the franchisor and the franchisee so as to avoid any confusion. All documents should be unambiguous and written to provide the franchisor with the maximum amount of protection possible.
If you or someone you know needs the assistance or legal counsel of an experienced franchise lawyer, please call one of our partners at (866)715-2789 , or complete the contact form provided on this site to schedule your free initial consultation.
