A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol (the franchisor) and someone who seeks to use that identification in a business (the franchisee). For example, McDonald's restaurants all share the same branding and menu items but are individually owned by franchisees. State laws govern how franchisors may operate and which disclosures they are required to make to prospective franchisees.
If you are considering purchasing a franchise, it makes sense to contact a business attorney with experience handling such procedures. They will be able to help you better assess the likelihood of success (based on financial data and other pertinent information), navigate the regulations, and secure funding. See Consumer Guide to Buying a Franchise to learn more.
Terms to Know
· Royalties: A share of the profit or product reserved by the grantor; a payment made to an author or composer for each copy of a work sold or to an inventor for each article sold under a patent (or, in this case, payment made by the franchisee to the franchisor based on a percentage of sales or a set rate).
· Franchise Disclosures: States have laws governing which types of disclosures franchisors must make to prospective franchisees, and the manner in which these disclosures must be made (such as average profit, operating costs, etc.).
Buying a Franchise? Why You May Need a Lawyer
After you have done some research and reviewed various franchise options, you will be presented with the franchise agreement, a legally binding contract. The agreement and the franchise disclosure document (FDD) usually are written in thick "legalese" and can be better interpreted by an attorney. To become better prepared, fill out FindLaw's Franchise Agreement Questionnaire and go over the answers with your attorney.
The FDD, which includes disclosures required by state laws, covers the franchisor's business experience, litigation history, bankruptcy filings, fees, initial investment, restrictions, franchisee's obligations, territory, trademarks, dispute resolution, and more. An experienced franchise attorney will be able to compare any given FDD with industry averages.
Franchisors almost always tell prospective buyers that their contracts are non-negotiable, but that is not the case. Remember, buying a franchise is an agreement between two parties; so you should protect yourself just as rigorously as the franchisor will protect itself.
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