Starting a business can be exciting, but it can also be extremely challenging between developing a brand, marketing, creating systems to provide services or goods, and completing the necessary day-to-day administrative tasks. Starting a business through purchasing a franchise can often be a way to give yourself a jump start on the common challenges facing an entrepreneur. When you purchase a franchise, you are essentially buying a means to overcome these challenges as it equips you on day 1 with many tools that a non-franchisee has to spend a tremendous amount of time and resources to develop. A franchise allows an entrepreneur to go into business for themselves but not by themselves.
However, franchise ownership carries with it a number of unique challenges and overlooking the legal aspects of becoming a franchisee is unwise. When you buy a franchise there are number of rules that you need to be aware of, both at the state and federal level. Franchisors are required to provide prospective franchisees with relevant information describing the legal commitments as well as the business relationship. It is this information you must study carefully. The Federal Trade Commission (FTC) regulates at the federal level, while at the state level, there is typically a state securities division or office of consumer affairs that’s responsible for enforcing the law.
Understand What It Means to Become A Franchisee
Buying a franchise presents an excellent opportunity to exercise your entrepreneurial skills within an established business format, and with ready-made resources and support available to you. The franchisor provides you with a brand, training, resources, unique pricing for supplies, and other support. To become a franchisee means that you become a part of a system of individual business owners who are operating their respective businesses using the same brand and similar methods. Ideally the franchisor provides you with most of what you need to succeed.
Recognize that while a franchise does constitute an opportunity to own and operate a successful business, you still need a variety of business skills to optimize your business. You will (and should) receive training from your franchisor, but ultimately, it will be your business skills that mark the difference between success and failure. You will receive the right to use a brand and hopefully that brand has been well-developed and marketed within your territory. However, the actual local marketing for your business is in your hands. Understanding this is key.
It is also important to recognize that the franchisee-franchisor relationship is extremely important for the success of your business and understanding the various aspects of the documents that are provided to you and the common issues that a franchisee faces is the cornerstone of a successful franchise.
Understanding your own contractual obligations to your franchisor is critical. A qualified attorney is essential to this process, and you should request legal assistance from counsel knowledgeable in the workings of franchise relationships as you undertake your due diligence and contract review.
There are two documents that dictate the relationship between the franchisor and franchisee. They are: the franchise disclosure document (or FDD) and the franchise agreement.
The FDD must be provided to you by the franchisor a minimum of 14 days before you sign the franchise agreement or pay any money. This document should be read and examined from cover to cover. If there’s anything you don’t understand, lean on your lawyer. Additionally, find other supporting information at the Federal Trade Commission website. Ensure that you know exactly what you are signing and paying for.
The FDD contains information on the most critical aspects of your business relationship, including: the franchise system itself, information about the franchisor, fees you will/may incur, training that will be required of you, sources of supplies, territory rights, rights to sell/transfer your business and other items required by federal and state law.
The FDD will always come bundled with the actual franchise agreement you will be asked to sign, which explains the legal rights and obligations between the franchisor and franchisee. This document will govern your relationship for the period of your franchise ownership; it will contain terms of purchase, as well as terms about renewal or transfer rights.
Due to the critical importance of this document, obtaining legal assistance from competent counsel in your review of the franchise agreement is imperative.
Who Do I Turn to If I Have Additional Questions?
In the course of your ownership of a franchise business, you may have questions related to the ongoing management of your business. Your franchisor should provide you with that support upon request, but you should also know that fellow franchisees are a wonderful source of support and well-suited to share best practices and their own tips for success. Over the course of your franchise ownership, you may also derive great benefit from third party business advisors or consultants who focus on helping franchise owners. Knowledgeable legal counsel will be able to direct you and guide you as you work with all of these resources.