Investing in a franchise can be rewarding and lucrative. Unfortunately, franchise business models are not easy to manage and can stall when disputes and misunderstandings arise. Legal disputes occur in all businesses, and a franchise is no exception. Franchise law is typically complex, having different legal aspects touching on various areas of law.
Before investing in a franchise, seek professional advice from a top franchise lawyer who will be of great importance in the future. A franchise lawyer provides legal advice, mitigates business disruptions, acts as the go-to person when disputes arise hence, avoiding costly litigations. In the U.S franchise businesses are governed by franchise law.
What is Franchise Law?
Franchise law is a combination of federal and state laws for governing and regulating franchises. The laws address several aspects of the franchise agreement, including the offer, acceptance, legal relationships, and the terms of sale. At the federal level, franchisors are expected to furnish prospective investors with pre-sale disclosures contained in a franchise disclosure document (FDD). More disclosures may be required to supplement the federal-level disclosures in some states.
Franchise agreements are binding and legal documents that regulate a franchise. The contents of a franchise agreement include:
- Expectations of the two parties.
- Obligations of the transacting parties.
- Permissions for the franchisee.
- Operating restrictions.
- The franchise fee payable by the new investor.
- Trademark details.
Ideal Running Time for Franchise Businesses
In most cases, franchise agreements run for 10 to 25 years. However, most average 10 years. Most franchise agreements include a renewal clause. Perpetual franchise agreements are considered binding and legal in some states.
Although the agreement may renew automatically, indefinitely, or after the end of an agreed period, the franchisee cannot terminate the original agreement. He/she should wait for the expiry of the agreed period or transfer ownership to interested third parties. Otherwise, they are liable for liquidated damages.
In some scenarios, the franchise agreement provides a way to resolve disputes in the event they occur. It may be through mediation or arbitration. If dispute resolution mechanisms haven’t been highlighted, the franchisee and franchisor may initiate the mediation process on their own. Unfortunately, mediation doesn’t always resolve some complex disputes. If mediation is unsuccessful, the disputing business partners should contact a franchising lawyer. Common disputes in a franchise include:
- Territorial disputes.
- Franchise agreement disputes.
- Disputes on franchise termination.
- Financial disclosure disputes.
- Compliance disputes.
Contractual and Agreement Disputes in a Franchise
Legal disputes in a franchise can cause conflicting interests, hindering business operations and growth. Having good legal representation before disputes arise is highly recommended. This facilitates prompt action and minimizes disruption when the business partners disagree. Since most franchise agreements typically favor the franchisor, the franchisee can easily be exploited when business disputes occur. Common disputes relating to franchise agreements include:
- Pre-sale disclosure.
- Noncompliance with the franchise agreement.
- Rights and privileges.
- Breach of trust.
- Fraud and false disclosures.
- Breach of a contract or licensing agreement.
- Enforcement challenges.
- Franchise termination disputes
In most termination disputes, the franchisor takes legal action to protect their interests. Regardless of the scenario, it’s wise to be prepared beforehand.
Qualities of a Competent Franchise Lawyer
Many states have well-established franchise laws, although most franchise agreements have conflict management mechanisms in place. Where the state franchise law is applicable, the pre-determined provision in the franchise agreement becomes void. In some cases, the state franchise law can give the franchisee authority to assert claims that would have been illegitimate under common law. A franchise lawyer acts as a go-between when the franchisor and franchisee are reading from different scripts.
Qualities of Competent Franchise lawyer
Strictly speaking, any lawyer can be a domestic franchise lawyer. However, due diligence should be done when hiring a franchise lawyer. A competent franchise lawyer should possess the following bare minimums:
- Widely experienced.
- Good reputation.
- Be a qualified lawyer.
- Should be committed and dedicated to franchising.
Franchise Agreements Best Practices
Seek Legal Counsel
Most people do not involve a lawyer for franchise disputes when establishing a franchise. Without any legal counsel, either party can easily be short-changed or taken advantage of.
Lack of Ambiguity
Be clear on the franchisors’ obligations from the word go. May means that they’re not obligated to do something but shall indicate obligation on their part and they’re expected to fulfill the same.
You should enter the franchise knowing that the success of the franchisor is not a guarantee that you’ll equally succeed. Working hard is the only guarantee for success.
Franchises should benefit the two parties, the franchisor, and franchisee, and one of the two should have an unfair advantage over the other party. This can only happen when investors involve a franchise lawyer before putting their funds where their mouth is.