The Legal Aspects
There are many elements of the franchise agreement, as well as the franchise deal itself, that can benefit from the advice of an attorney. These can include:
- Reviewing the franchisor's offering circular (the UFOC) and evaluating the opportunity
- Negotiating points of the final contract
- Limiting your personal liability by establishing the correct business structure
- Dealing with trade secrets and other proprietary issues
- Establishing your own trade name
- Dealing with state statutes
Your best bet is to use an attorney who specializes in franchises. The ABA Forum on Franchising is the association that publishes the Franchise Law Journal and also maintains a list of Who's Who among franchise attorneys. Make sure your selected attorney is a member of this organization, not because it screens them in any way (there are no membership requirements), but because the organization itself stays on top of franchise law and offers seminars and other current franchise information for members. Using an attorney who is a member would be a benefit.
Even though you may use an attorney for these areas, you may still want to brush up on the laws yourself. The Federal Trade Commission (FTC) enforces franchising regulations and investigates any complaints. The Franchise Rule deals with the franchising contract and requires that the franchisor give full disclosure of earnings, company history, litigation, and key-officer experience levels. It also requires that contact information be provided for existing franchised units. The rule does not, however, cover anything that happens after the contract is signed, such as problems with product availability, site selection, and placement of other units within the same geographical market.
There are some groups pushing for uniform standards of conduct once the franchise agreement has been signed. The Asian American Hotel Owners' Association (AAHOA) is one that has actually created its own 12 Points of Fair Franchising in order to improve relationships. The agreement deals with issues like who pays for brand reimaging, new signage, dispute resolution and database information.
National fair franchising legislation was also introduced. HR 3308, also known as the Small Business Franchise Act, was introduced in 1999 by representatives Howard Coble, R-NC, and John Conyers, D-MI. The legislation would provide franchisees with a right of action in federal court in the event that the corporate franchise violates any provision of HR 3308. It was sent to the House Subcommittee on November 17, 1999. It was tabled during the 106th Congress, but is slated for reintroduction in the 107th Congress. There is bipartisan opposition to the bill in the Congress; however, organizations such as the American Franchisee Association highly support it. Opposition states that the bill tries to establish a "one size fits all" model to franchising, and that simply won't work with the many differences in franchise businesses and systems.
In addition to this, 16 states have their own franchise relationship law.
At the End of the Road
Part of the franchise agreement will cover what happens at the end of the term. Many franchise systems offer renewal options for the franchisee. In some cases, however, the franchise company will try to deny the renewal. There are 16 states that have franchise relationship laws in place. If the franchisor tries to deny renewal in one of these states, it may be violating state law. The focus of the laws in these 16 states is on regulation of the renewal and termination of franchises. Nearly all franchise statutes that address renewal issues require specific franchisee misconduct for a franchisor to be able to deny renewal. There are, however, some states (California and Wisconsin) that permit a franchise to deny renewal for economic reasons, such as a company-wide decision to discontinue franchising.
The conditions for any of these non-renewal situations would be a part of the original franchise agreement.
Transfer of Ownership
Transferring ownership of a franchise may also be more difficult than you might think. There may be provisions and restrictions in the franchise agreement that prohibit it, or at least restrict it. It is a difficult situation because the franchisee owns the assets of the business, but the franchisor owns the brand and trademark.
Ownership transfer elements of franchise agreements often include these types of statements:
- The franchisor gets the right to approve transfer.
- The franchisee must execute a release (unless limited by state law).
- The franchisor gets final approval of the prospective franchisee's qualifications.
- There are limitations on transfers to competitors (usually upheld by courts).
- The franchisor gets the right of first refusal under the same terms as the prospective franchisee.
- The franchisee must have no outstanding fees owed to the franchisor.
Three of the 16 states with franchise relationship laws (Iowa, Michigan, and Wisconsin) also have provisions that directly relate to franchise transfers.
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