WHAT ARE THE LEGAL ISSUES OF FRANCHISING?
A good relationship between the franchisor and franchisee is critical for the success of both parties. Since franchising establishes a business relationship for years, the foundation must be carefully built by having a clear understanding of the franchise program. Unfortunately, understanding the legal language of franchising can be daunting. The advice of an experienced franchise attorney should be sought to help a prospective franchisee understand the legal issues and to protect them from making costly mistakes.
Franchising is governed by federal and state laws that require franchisors to provide prospective franchisees with information that describes the franchisor-franchisee relationship.
The two main franchising legal documents are:
- THE DISCLOSURE DOCUMENT (also known as the FDD)
The purpose of the FDD is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements they will need to sign so that they can make an informed decision.
In addition to the disclosure part of the document, the FDD includes the actual franchise agreement as well as other agreements the franchisee will be required to sign, along with the franchisor’s financial statements. The FDD is designed to give you some of the information you need in order to make an informed decision about investing in a particular franchise.
By law, a franchisor cannot sell a franchise until the franchisor has presented the prospective franchisee with a Disclosure Document. In fact, 14 states require franchisors to register their FDDs with the state or to notify them that they will offer franchises before they begin to conduct any franchising activity in the state.
The FDD includes information about:
• the franchisor
• the company’s key staff
• management’s experience in franchise management
• franchisor’s bankruptcy and litigation history
• initial and ongoing fees involved in opening and running
• required investment and purchases
• territory rights
• responsibilities of the franchisor and franchisee
• other franchisees in the system with contact information
Receipt of the FDD is governed by the “14-day rule.” This is a cooling-off period in which franchisors must give prospective franchisees 14 days to think about their decision before they are allowed to sign the franchise agreement.
- THE FRANCHISE AGREEMENT
• term (duration) of the franchise
The franchise agreement is more specific than the FDD about the terms of the relationship between the franchisor and franchisee.
The franchise agreement includes information about:
• the franchise system, such as use of trademarks and products
• rights and obligations of the parties: standards, procedures
• payments made by the franchisee to the franchisor
• termination and/or the right to transfer the franchise
• Training, assistance, and advertising
The franchise agreement is the legal, written document that governs the relationship and specifies the terms of the franchise purchase. A prospective franchisee should closely review the franchise agreement and consult with a professional advisor, like an attorney or an accountant, before making a final decision.