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Franchising is an accelerated growth strategy utilized by some of the most successful entrepreneurs in the world to generate wealth. The franchise business model works for many because it creates a strategic partnership between the franchisor (the business that owns the brand, systems,and processes) and the franchisee (the individual or entity who purchases the right to operate a business using the franchisor’s brand, system, and processes). The franchise model can be deployed in several ways but the focus should always be on ensuring mutually beneficial success.
Franchising presents unique opportunities for success. In fact, many of the best known brands in the world were built or expanded through franchising. For example, McDonalds, Subway, Pizza Hut, and KFC are all franchised restaurants. Likewise, big businesses have been built from purchasing franchise opportunities. For example, Flynn Restaurant Group operates over 2,000 locations under brands including Applebees, Arby’s, Panera, Taco Bell, Pizza Hut, and Wendy’s.
We recognize that few franchisors or franchises will grow to this scale. Nonetheless, its is important to recognize that all entrepreneurs must start somewhere. Even Dick and Mac McDonald started with a single location before franchising. In the same vain, not all prospective franchisees want (or can afford) an established brand. Franchising presents opportunities across various industries and at varies price points.
Since the dawn of modern business, there have been good and bad opportunities offered from coast to coast. While federal and state regulation is not always advantageous to business owners, it is extremely helpful to prospective franchisees evaluating a franchise opportunity. Specifically, franchises can only be offered and sold through disclosure by a franchisor of a franchise disclosure document (often referred to as the “FDD”) to a prospective franchisee.
For franchisors, compliance isn’t optional. It is an unlawful trade practice to offer a franchise without complying with federal requirements and causes of action often arise under state law.
Sound legal guidance empowers franchisors and franchisees with the knowledge they need to make sound business decisions. Franchisors need initial support to launch a franchised business and ongoing support to maintain operations and ensure compliance with federal and state laws. Franchisees need support evaluating franchise opportunities, negotiate terms, and prepare to launch their own business.
Franchise Legal Hub is designed by a franchise law firm to serve as resource to the franchising community. This site will grow and develop to provide an overview of franchise legal requirements, provide updates on trends and developments, and link to reliable legal sources.
The buyer will obtain the right to operate a business that is identified or associated with the seller’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark
The seller will exert or has authority to exert a significant degree of control over the buyer’s method of operation, or provide significant assistance in the buyer’s method of operation
As a condition of obtaining or commencing operation of the business, the buyer makes a required payment or commits to make a required payment to the seller or its affiliate.
If these three elements are present, its likely a franchise! There are few narrow exemptions under 16 CFR Part 436, Subpart E, Section 436.8. However, calling a franchise relationship an affiliate or licensee does not make it so. Likewise, refusing to put an agreement in writing does not negate that a franchise relationship is formed. Its important to work with trained legal counsel to understand what satisfies these elements and ensure you either franchise the correct way or do not accidentally franchise. The consequences of illegal franchising can be severe. Franchises can only be offered by disclosure of a Franchise Disclosure Document (the “FDD”).
Franchising is regulated on the federal and state level (to varying degrees). The federal Franchise Rule establishes the requirement for developing the FDD. The Franchise Rule mandates certain disclosures and sets forth the manner of disclosure. There are 23 separate areas of disclosures and each is referred to as an Item in the Rule. You will find each item in every valid FDD. However, there is no review or approval process on the federal level. State regulators are largely the ones who enforce franchise laws through adherence of the federal rule and state franchise laws. For franchisors, this means they must develop the FDD and then obtain approval before offering or selling franchises in certain states. The laws are not uniform across the country, so specialized knowledge in franchise law is imperative.
The Franchise Legal Hub touches on various aspects of franchising across the country as a franchisor and franchisee. Follow these links for an overview of federal franchise law and an overview of state franchise laws.
The goal of this website is to compile legal resources in a central location dedicated to franchising and offer our perspective on certain issues, but the information contained on this website is no substitute for legal advice. Offering legal advice requires an understanding of your unique circumstances, needs, and objectives. There is no one sized fits all approach and there many nuances in franchise law. Further, rendering legal advice requires an attorney client relationship and that relationship is not established by viewing this website. The attorneys who maintain the Franchise Legal Hub only accept new clients through a formal engagement process, which typically requires advanced payment. They are not able to accept every client and they are not the right fit for every entrepreneur. The first step in seeking franchise legal support is to consult with a franchise attorney and see if they are a good fit for your legal needs. Please understand, this website is not a solicitation to residents of any particular state and our attorneys only practice law when permitted by law, rules, and regulations. You accept our terms and conditions and privacy policy by visiting our website.
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