What is Franchising Law?
Under federal law and under the laws of most states which regulate franchises, the definition of the best franchise law firms is met if the following three elements occur: (1) a trademark is licensed; (2) substantial business advice is given, or control is exercised in the operation or marketing of the business; and (3) a fee is charged. There are several exceptions and exclusions, but that is the general rule. Once a company triggers all three of those requirements and it cannot fit within an exception or exclusion, it must comply with federal franchise law and any applicable state laws.
Under federal law, the franchisor must provide prospective franchisees, a Federal Disclosure Document (FDD). It covers the franchisor’s business experience, litigation history, bankruptcy filings, fees, initial investment, restrictions, franchisee’s obligations, territory, trademarks, dispute resolution, among other subjects. The objective of the FDD is to provide the prospective franchisee the information he or she needs to know in order to make a reasonably prudent decision as to whether or not to purchase the franchise.
When a business hits its stride and has found a winning formula that is working well, the owners may wish they could clone the business across the country. Many times they lack the capital to fund such the start-up expenses required for such expansion. Franchising offers an excellent alternative to organic growth. The franchise relationship allows a new comer to capitalize on the business experience and acumen of the franchisor, while allowing the franchisor to expand its brand and business concepts without having to invest in each new business. The franchisee puts up the start-up capital. The franchisor is often expected to not only provide an operations manual that shows the franchisee how to run the business, but it also typically assists the franchisee in finding the right location and in providing the initial training. The franchisor also helps build the brand through a national advertising program.Â
We can help any business considering the creation of a franchise system, think through the various legal and business issues that could make or break the success of the enterprise. For instance, we usually advise our clients desiring to start a franchise system to open at least three stores using the same system to make sure its success can be duplicated at various locations. Such experience puts the franchisor in a much better position to be able to provide the information required in the FDD, such as start-up costs.
We also frequently advice businesses considering whether they should purchase a franchise. The obvious starting point is the review of the FDD. If the franchisor does not have one to offer, that is not a very good sign! We also review all of the contracts and other documents included with the FDD. Beyond that, we guide the client as to what due diligence it should do on its own and which items we should explore. For instance always check out the status of the trademark registrations of the brands the franchisor uses in its system.
In the event the relationship between the franchisor and the franchisee goes badly, we can and have assisted the franchisor, on some occasions, and the franchisee, on other occasions, in resolving their disputes.
At Ray Law Firm, PLLC, our team is well-versed in business tax, franchise, and employment law as well as other complex areas. Over the course of our legal careers, we have represented clients needing help with contracts, transactions, and litigation. We leverage our years of experience to obtain favorable results.
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