Franchising provides companies the opportunity to expand their business into new sectors and gives local entrepreneurs the ability to run their own businesses. If you’re not sure how to start a franchise, you may be able to find help through the franchising company. The terms and conditions of your business arrangement will be spelled out in your franchise agreement. This guide will help you understand some of the legal requirements to start a franchise as well as common legal issues affecting the franchise industry.
Understanding the Franchise Agreement
The franchise agreement serves as the contract between you (the franchisee) and the franchising company (the franchisor). The franchise agreement explains your rights and responsibilities as a franchisee, and it also explains what benefits you can expect to receive from the franchisor.
More specifically, the franchise agreement will provide guidance on such topics as:
- Franchise fees and royalties
- Operating territory
- Benchmarks and operational timeline
- Duration of the contract and renewal options
- Training and support
- Marketing materials
Most importantly, the franchise agreement grants you the legal ability to operate under the name of the franchisor.
It’s important to understand this document thoroughly before you commit to a franchise. If you’re not certain about the legal requirements to start a franchise after reading this document, you may want to consult a lawyer who can help you navigate unfamiliar terms.
Who Bears Responsibility?
Unfortunately, the franchising model doesn’t always provide clarity about who bears responsibility for certain actions. If something should go wrong, is it the responsibility of the franchisor or franchisee? Ideally, these types of legal issues are addressed in the franchise agreement in order to prevent confusion later on.
Errors in the Franchise Disclosure Document (FDD)
Federal law requires franchisors to provide the potential franchisee with an overview of the franchise’s history and financial performance. This document is known as a “Franchise Disclosure Document” (FDD) and must be presented to the franchisee before signing the franchise agreement.
Errors or mistakes in this document can mislead prospective franchise owners and can leave the franchisor liable for presenting false information.
Permits and Licensing
The legal requirements to start a franchise can vary by industry as well as geographic location. Some franchises may have to obtain additional licenses and permits before their doors open for the first time.
Most commonly, this affects restaurants that serve alcohol. The franchise will have to obtain a liquor license and renew this license on a regular basis. Failing to obtain and display this license can result in severe penalties, and it can even cost the franchisee their business.
State Franchising Laws
In addition to having federal laws surrounding franchise operation, some states establish additional protections for franchisees. Franchise relationship laws, for example, ensure that franchisors adhere to the terms of the franchise agreement.
Some states even require the franchisor to file or register their FDD with the state regulator. If you’re opening a franchise in a state with franchise regulation laws, you will have to obtain permission from the regulator before you are allowed to operate.
Many first-time franchise operators don’t actually know how to start a franchise on their own. In general, that’s okay because the franchisor can provide guidance, training, and access to resources and equipment.
Problems occur when the franchisor fails to provide this kind of support to their franchisees. Once again, this is why franchisees need to fully understand the franchise agreement carefully. If the agreement promises corporate support, the franchisor is legally obligated to provide it. Otherwise, franchisees will find themselves on their own.
Contract Length and Termination
The franchise agreement will define the length of time that the franchisee will operate the franchise, which is often around five years or so. The agreement will also spell out any renewal clauses that allow franchisees to continue working once the contract expires.
The franchise agreement will also grant franchisors the right to terminate the contract if the terms are not met. For example, if the franchisee fails to meet certain financial benchmarks or deadlines, or if they fail to pay their royalties, they may be subject to early termination.
Franchising Made Simple
It’s important to know how to start a franchise without getting yourself into legal trouble. That journey starts with finding the right franchise. Franchise Opportunities makes it easier thanks to the franchise locator tool. Use this tool to search for franchises in your state or region, and discover the adventure that awaits you as the owner of your own business.