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Have you considered owning your own business by franchising? Getting your foot in the door takes a lot of research to make sure a business is the right fit for you financially. If you’re wondering how to start a franchise, you’ll also need to consider and understand the legal requirements laid out by federal and state governments. The legal elements of a franchise differ from state to state, but federal franchise law ensures protection for both the franchisee and franchisor. Because laws and regulations apply to all franchising efforts, you’ll be able to focus on what best fits your business wants and needs.
FranchiseOpportunities.com provides you with resources to determine which franchise best suits you by narrowing options down by price, industries, and state of operation. This takes the guesswork out of which franchises are or are not for you. Let’s discuss what a franchise is and the legal requirements necessary to start one.
A franchise is when an aspiring business owner purchases an established company’s business model to sell products or services provided by the franchisor using the brand’s trademark and name. This is a mutually beneficial deal, as the franchisor receives a percentage of sales as a royalty fee—this can be one-time, monthly, quarterly, or annually—and the franchisee takes the remaining profit after business expenses.
With small businesses, it is difficult to build a brand to the point of expanding beyond a local area. One of the advantages of a franchise is providing the opportunity to open businesses nationwide with an already established brand. Buying into a franchise means it is possible to start a business without the difficulties of beginning from scratch. In general, franchises reduce the risk of owning and managing a business. FranchiseOpportunities.com provides you with several options of companies to choose from within your budget and make sure you meet the requirements to be a franchise owner.
Once you have decided you’re interested in franchising a business, it’s important to consider the legal franchise requirements. Federal and state laws govern which information franchisors need to provide to the franchisee. While franchise laws by state vary—it is important to research your state’s rules—all franchise disclosure laws determine how the two parties legally move forward with the business agreement.
The franchisor-franchisee relationship relies on two franchise legal documents: the franchise disclosure document and the franchise agreement.
You might be wondering, “Is a franchise a legal entity?” Yes, it is. Often franchises are structured as an LLC (limited liability company), S-Corporation, or C-Corporation. Of course there are exceptions to the legal structure, but each franchise is subject to laws and regulations set forth by the federal and state governments.
The franchise disclosure document (FDD) offers a wealth of information to educate you about the franchise you’re considering. The FDD includes the actual franchise agreement as well as other terms that the franchisee will be required to sign in addition to the disclosure section.
The document contains information on the following franchise components:
According to the Federal Trade Commission (FTC) Franchise Rule 16 CFR Parts 436 and 437, a franchisor needs to provide a prospective franchisee with the FDD “at least 14 calendar days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale.” The 14 days start after the document has been delivered, not when it is sent. Any agreement or payment can be signed or received on the 15th day after delivery.
If you have any questions about what the document contains, you should consult with your lawyer. The following concerns can be resolved with the assistance of an attorney:
The FTC’s website also provides you with more detailed information regarding franchising.
The second important document to understand in the franchise process is the franchise agreement.
The franchise agreement is the primary document that defines the legal franchisor-franchisee relationship and lays out the terms of the purchase. A franchise agreement grants the franchisee the legal right to open and operate a franchised location. This document also determines:
The franchisor is under no obligation to renew your contract and might change the terms when it comes time to sign another agreement. However, if you pay your royalties and do not break any rules, you will most likely be able to continue your contract with the business. Of course, this is a legally binding document and you agree to the terms and conditions upon signing. The International Franchise Association recommends carefully analyzing the agreement with a legal or financial professional before signing the document.
While franchise agreements contain significant and similar terms, it’s important to note there are different types of franchise agreement depending on the role a potential franchisee wants and their expertise within that industry.
If you are a new prospective franchisee, a single-unit franchise agreement grants you the rights to open and operate a single franchise “unit.” While other contracts can be more complicated, single-unit agreements are generally the most common and simple for entrepreneurs to get started in a particular franchise.
A multi-unit franchise agreement permits a franchisee to open and operate many units with the permission of the franchisor. This agreement is typically a natural extension of a single-unit contract for some franchisees and allows them to expand their business ventures. A timeline will usually be established during which the franchisee is expected to open the units.
The area development agreement, as opposed to the multi-unit agreement, grants the franchisee exclusive rights to develop the territory. During the contract duration, no other franchisees will be permitted to open units in that geographic region.
The master agreement gives the franchisee the authority and obligation to open and operate a specific number of units in a specific territory, like an area development agreement. However, a master franchisee also has the ability to sell sub-franchises to other people in the territory. More importantly, they are responsible for the training, recruiting, and success of the other franchisees under this arrangement. Because of this role, they are entitled to fees and royalties from the territory's franchisees.
Franchises can legally structure themselves with a few different options, which impact legal obligations and tax implications, as well as operations and profits. Choosing a beneficial structure is one of the main requirements to start a franchise to ensure your assets, profit, and stakeholders are properly taxed. It is critical to determine the right legal structure for your franchise business before you sign the franchise agreement. There are three common business structures used by franchisees:
Determining a legal structure should be one of the first steps in franchising. Speaking with a legal professional can help you better understand which structure best suits your needs and business.
At FranchiseOpportunities.com, we collect all of the valuable information to help you develop a franchise strategy. We were founded in 1999 and have a combined experience of over 30 years of helping entrepreneurs build strong businesses. We are confident you won’t find a more qualified team to assist you in your career. Visit our website today for more information on how you can start a franchise!
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