Key Points:
- Hiring a franchise lawyer ensures you understand the Franchise Disclosure Document (FDD) and franchise agreement, and may enable you to negotiate better terms
- Engage an attorney before signing the franchise agreement—ideally as soon as you receive the FDD.
- Choose an attorney that specializes in franchise law and has experience handling franchise litigation.
You’ve done it—you’ve made the decision to purchase a franchise. You completed your research, compared your options, and landed on the perfect franchise brand for you. It’s an exciting time, and you’re ready to get started! But before you sign on the dotted line, it’s critically important that you consult with a lawyer so you know what you’re agreeing to and what you can expect. After all, purchasing a franchise is no small investment.
Legally binding franchising documents are chock full of important details you may miss without an experienced franchise attorney by your side. While legal advice is never cheap, consulting with a franchise lawyer will be money well spent. It’s an investment in your future personal and financial well-being.
Why Should I Hire a Franchise Attorney?
In the majority of cases, it is best to work with an attorney focused on franchising. While general business lawyers will be able to provide counsel regarding business law, franchise-specific lawyers will be able to offer specialized advice. They’ll be well versed in reading Franchise Disclosure Documents (FDDs) and franchise agreements. They know exactly what to look for to ensure the terms you agree to will benefit you. And, because they’re focused solely on franchises, franchise lawyers typically deal with the same companies time and time again. This experience can benefit you as they’re familiar with the workings of each individual brand and they’ll be able to give you the inside scoop.
Franchise lawyers may also be able to help you negotiate the terms of your agreement and offer guidance on which aspects of the agreement are vague and require additional clarification from the franchisor.
Understanding the Franchise Disclosure Document: Franchise attorney Tom Spadea explains the critical components of the FDD, including litigation history, initial fees, and financial performance representations, on this episode of our podcast, From A to Franchisee.
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Understanding Franchise Agreements
A franchise agreement is a legally binding contract between a franchisor and a franchisee that outlines the terms and conditions of their business relationship. This document defines the rights and obligations of both parties, including the franchisee’s use of the franchisor’s trademark, business system, and proprietary information.
Essentially, it sets the stage for how the franchise business will operate and what each party can expect from the other. A well-drafted franchise agreement is needed for the success of a franchise business, as it provides a clear understanding of the expectations and responsibilities of both the franchisor and the franchisee. A franchise attorney can assist in making sure the franchise agreement is solid for both parties.
When Should I Hire a Franchise Attorney?
You need your franchise attorney to review your franchise agreement before you sign it. You’ll also need your attorney to conduct a complete review of the FDD. FDDs are publicly filed documents. You can always access a company’s FDD and you should never have to pay. However, when you’re serious about investing in a franchise opportunity, the franchisor is legally required to supply you with the most recent company FDD.
Once you have the FDD, you’re ready to hire a franchise attorney. Prior to meeting, review the documents on your own and prepare questions and concerns for your meeting. Don’t worry if some parts of the FDD don’t make sense to you. FDDs usually contain an extensive amount of “legalese” that your franchise lawyer will help to put into layman’s terms.
Navigating Franchise Law on Your Own
Franchise law is a complex and specialized area of law that dictates the relationship between franchisors and franchisees. It involves a range of legal issues, including contract law, intellectual property law, and business law. This is designed to protect the interests of both franchisors and franchisees, while also promoting fair business practices and competition.
Navigating franchise law can be challenging due to its intricacies and the specific regulations that vary by state and country. Having an experienced franchise attorney who understands the nuances of franchise and distribution law can be a big help to any aspiring franchise owner. They can help ensure that your franchise business complies with all legal requirements and operates smoothly.
How a Franchise Attorney Can Help You Negotiate the Franchise Terms
Richard L. Rosen, a New York-based franchise attorney, shared how he helps his clients negotiate their franchise terms:
Royalty payment structure
Some franchisors collect royalty payments through automatic withdrawals from a franchisee’s account, which can make tough financial months even more stressful. This payment schedule is sometimes negotiable.
Right to close
Not all franchisees are allowed to close their business if things don’t go as planned. Instead, they’re obligated to continue operations through the end of the term of the agreement or until they can sell their franchise. In some cases, an attorney can negotiate a franchisee’s right to close down sooner should the business not take off as planned.
Right of first refusal
If a franchisee decides to sell a franchise unit, the franchisor has the option of buying it back themselves or allowing a new owner to buy it and take over operations. In some cases, the franchisee is tasked with finding a new buyer, which the franchisor then needs to approve before the final sale. One potential pitfall is that a franchisor could, in this case, veto a buyer who makes a high offer so that they can make an offer to buy back the franchise for less.
Litigation statute of limitations
Should a dispute arise between the franchisee and the franchisor, a franchisee may want to seek litigation to solve the matter. Some franchise agreements include a requirement for a mediation period during which the parties involved are supposed to try to arrive at an amicable solution before getting lawyers involved. While this is a fine policy in and of itself, the mediation period can sometimes use up a large portion, if not the entire amount, of time included in the statute of limitations for the dispute. This means that if mediation is unsuccessful, the franchisee may not have much time to file suit properly or may run out of time to do so. It is important to ensure that the statute of limitations and mediation requirements do not conflict.
Non-compete clause
Are you considering opening a franchise or launching another brand somewhere down the road? Do you want the freedom to stay in the same industry with another franchise if you decide to close or sell yours? Non-compete terms may not allow you to do so. It is essential to ensure that the terms are not too restrictive.
Franchise territory
Most franchise systems offer franchisees an exclusive territory. This may be outlined as a certain distance from your business address, for example, a specific city or county or some other delineation. To ensure you are able to attract as many customers as possible and maximize profit, your franchise attorney can try to negotiate terms that ensure your territory is as large and inclusive of population centers as possible.
What If the Franchisor Says Their Terms Are Non-negotiable?
Many franchisors will say that their terms are non-negotiable. Typically, franchisors don’t want to give one franchise owner more preferable terms than another, which could create dissent and resentment within the system.
Regardless of whether a franchisor is willing to bend on its terms, having a franchise lawyer review them is a MUST. Your attorney will ensure you understand the terms of the agreement so you can decide whether or not they are in line with your needs and goals.
You should, however, advise your attorney early on if the franchisor indicates that they are not willing to negotiate. This will save you the cost of your attorney’s time rewriting parts of the agreement.
How Do I Find the Right Franchise Attorney?
Choosing an attorney with extensive franchise experience is important. There are several resources that can help connect you with franchise lawyers in your area.
- IFA. The International Franchise Association (IFA) provides a list of their attorney partners on their website. While these firms are reliably franchise-oriented, some work exclusively for franchisors. Also, all pay for IFA membership.
- SBA, Bar Association, Chamber of Commerce. Check with your local Small Business Association (SBA) office, Chamber of Commerce, and Bar Association for listings and recommendations of local franchise attorneys.
- Current Franchisees. Ask some of the franchisees of the system you are considering who they used for legal counsel and what their experience was.
What to Look For:
Once you’ve narrowed your choices down to one or two franchise attorneys, be sure to research them online. You may find reviews, associations they belong to, articles they’ve written, and other information that will provide you with helpful insight. See if you can hone on the following:
- Look for an attorney who specializes in franchise law: Specialization ensures that the attorney has in-depth knowledge and experience in handling franchise-specific issues.
- Check for experience in handling franchise disputes and litigation: An attorney with a track record in resolving franchise disputes will be of more help should a dispute arise.
- Ask for referrals from other franchisees or business owners: Personal recommendations can provide insights into the attorney’s effectiveness and approach.
- Interview multiple attorneys: Speak with several attorneys to find one who is a good fit for your needs and budget.
When interviewing attorneys, request to talk to each of your final candidates to get all of your questions answered before making a decision. Rosen suggests asking any lawyer you’re considering the following questions:
- What is your experience with franchise law?
- What honors or awards have you received?
- How do your clients perceive you?
- How do other attorneys perceive you?
- How do you approach a franchise review (communication, discussions, negotiations, etc.)?
- Can you help with my business analysis?
- Do you represent franchisors and franchisees? What is the breakdown?
- Have you ever dealt with X (fill in the name of the franchise you are considering here)? What experience do you have with litigation? With arbitration? With mediation?
- Are you familiar with the X (fill in the industry of the franchise you are considering here) industry?
- What is your fee structure?
- What should I expect from this process and experience?
Common Issues Handled by Franchise Attorneys
Franchise attorneys handle most legal issues related to franchise law, including:
- Drafting and reviewing franchise agreements: Ensuring that the terms are fair and clearly defined.
- Negotiating franchise agreements: Helping to secure more favorable terms for the franchisee.
- Resolving franchise disputes: Addressing conflicts between franchisors and franchisees through mediation, arbitration, or litigation.
- Advising on Franchise Disclosure Documents: Ensuring that the FDD is accurate and complies with legal standards.
- Representing franchisees in litigation: Providing legal representation in court if disputes escalate.
- Providing guidance on franchise law compliance: Helping franchisees understand and adhere to relevant laws and regulations.
Very few franchisees are capable of doing these on their own, which is why it’s so important to have a franchise attorney ready to assist.
How Much Does a Franchise Attorney Cost?
While you may find some franchise lawyers are willing to offer a flat rate for a specific service, such as a consultation or to review an FDD, the final cost of their services will depend on how much time they spend on your case.
Many franchise lawyers charge an hourly fee with a retainer, which is a lump sum paid upfront for a service. The retainer is based on an estimate of how long your case will take. Services in excess of the agreed-upon terms of the retainer will incur an hourly fee.
If there is no negotiation of terms or multiple revisions to franchise documents, your bill could be between $400 and $1,000. If your attorney needs to do extensive rewriting, reviewing, or correspondence with the franchisor, you’ll pay more for the additional time.
At the end of the day, finding a reputable and experienced franchise lawyer is truly a worthwhile investment to alleviate risk and get the best possible terms in your franchise agreement.
Related:
Key Questions to Ask Before You Buy a Franchise
Before the Business Plan Comes the Franchise Vision Plan
