Deciding whether to buy a franchise or start an independent business requires consideration of a variety of legal, financial and practical considerations. While many people find success as franchisees, a significant percentage of franchisees fail. Of course, many independent businesses fail as well. In fact, according to the Small Business Administration (SBA), failure rates of franchised outlets and independent businesses are roughly equal. When trying to decide between buying a franchise and starting an independent business, here are some important considerations to keep in mind: 1. What is your business background? If you start an independent business you will, by definition, be on your own. Unless you have a natural business acumen, without a significant business background, you may struggle to find success independently. This is especially true with a brick-and-mortar business such as a convenience store, which requires you to lease retail space, hire employees, and maintain a sizeable inventory. However, you need business savvy to operate a successful franchise as well. Even when you are propped up by an established business model and have a real-world-tested system for running your business (all franchises should offer this, but not all of them actually do), you still need to make the day-to-day decisions. If you don’t know how to run a business, you are likely to struggle regardless of whether you choose to operate independently or as a franchisee. 2. What does the market demand? For certain types of businesses, operating under a franchised brand can offer a significant advantage. […]

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If you have been looking for information about your rights as a franchisee online, you may have come across something called the, “Universal Franchisee Bill of Rights.” While this sounds promising, unfortunately, it does not actually grant you any rights as a franchisee. As stated by the Coalition of Franchisee Associations (CFA): “This Universal Franchisee Bill of Rights is a fairness doctrine. It has been developed by franchisees in multiple systems and industries to identify the basic terms of fairness that are missing in their franchise agreements, and [that] must be restored to ensure the success and growth of the[ir] franchise systems.” In other words, rather than providing franchisees with legal protections, the Universal Franchisee Bill of Rights reflects protections that are absent from most franchise relationships. As a result, reviewing the Bill of Rights is not an exercise in understanding how you are protected, but rather in understanding the risks involved in buying a franchise. Summary: Universal Franchisee Bill of Rights There are 13 provisions in the Universal Franchisee Bill of Rights: Freedom of Association. You should have the right to communicate and pool resources with other franchisees. Good Faith and Fair Dealing. While some states have franchise relationship laws that impose a requirement of good faith and fair dealing, this protection is absent from most franchise agreements. Uniform Application of Brand Standards. Franchisors should enforce system standards equally and a non-discriminatory manner. However, discrimination is a common practice in many franchise systems. Full Disclosure Regarding Fees Collected from […]

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When considering franchise opportunities, there are numerous factors that go into making a profitable investment. From the franchisor’s reputation to your own personal desire to operate a particular type of business, the more boxes you can check, the more likely you are to find success as a franchisee. Of course, success is never guaranteed. In fact, data from the Small Business Administration (SBA) indicate that about half of all small businesses fail within the first five years, and this includes franchises. So, if you are thinking about buying a franchise, what can you do to increase your chances of success? Here are some tips from the franchisee attorneys at the Goldstein Law Firm: Finding Success as a Franchisee: 7 Tips for Potential Buyers 1. Due Diligence Before buying a franchise, it is critical to gather as much information as possible. Make sure you read (and understand) the FDD and franchise agreement, avoid relying on information the franchisor provides you orally, and prepare a thorough list of questions to ask current and franchisees. 2. Financial Planning How will you fund your initial investment? How will you fund your first six or twelve months of operations? Many franchisees fail because they do not have adequate financial resources to stay afloat during periods of unprofitability. 3. An Informed Buying Decision The decision to buy a franchise should be based on facts, not a blind desire to “be your own boss,” and not the promotional materials provided by the franchisor. If you do not […]

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You have spent the last five years (or longer) learning the business and building a reputation in your local community. Your franchise agreement is about to expire, and you want to begin operating independently. There’s only one problem: Your franchise agreement includes a non-competition covenant which states that you can’t operate a similar business in your geographic area for the next several years. So, this begs the question, “Is the non-competition clause in your franchise agreement enforceable?” As a General Rule, Non-Competition Clauses Are Enforceable In the context of business-to-business contracts, the general rule is that non-competition clauses are legally enforceable. This is an acknowledgment of the fact that there are certain circumstances in which a company can have a legitimate business interest in preventing competition. For example, if a company supplies information about a proprietary business system and allows someone else to use its brand to grow a business (sound familiar?), it may be fair for that company to prevent competition for a limited period of time. Possible Exceptions to the Enforceability of Franchise Agreement Non-Competes However, the protections available to franchisors through the use of non-competition covenants are not absolute. For example, franchisees may be able to avoid (or limit) their competitive restrictions based upon: 1. State Law Prohibition on Enforceability The laws regarding enforceability of non-compete provisions vary from state to state. California’s law is one of the least favorable to companies seeking enforcement, as it flatly prohibits competitive restrictions in certain types of relationships. While the […]

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It was only a matter of time before the worlds of franchising and legalized marijuana intersected. According to Blue MauMau, Colorado-based Green Man Cannabis has announced plans to open 50 new outlets through franchising within the next three years: “Christian Hageseth, the seasoned entrepreneur behind Green Man Cannabis, touts his dispensaries to be the best in the nation. He says Green Man is well known for its connoisseur grade craft cannabis and many Cannabis Cup wins. The business owner says he is now focused on building the world’s most powerful cannabis business franchise system under his new brand, One Cannabis. He touts that he has more than 20 years of experience in the business world and nine years in the cannabis industry. . . . One Cannabis, based in the founder’s home state of Colorado, expects to have 50 locations within the next 36 months.” Legal Considerations for Cannabis Dispensary Franchisees It appears that One Cannabis will initially be focusing its franchising efforts in Colorado, which has one of the most-favorable recreational marijuana laws in the nation. However, with the Justice Department’s rescission of the well-known (and heavily-relied-upon) Cole memo in January 2018, the future of recreational marijuana in the United States has shifted back to a greater level of uncertainty. State authorities in Colorado and other states have publicly opposed the Justice Department’s decision and indicated that they will not be revisiting their enforcement policies. But, the fact remains that marijuana is a Schedule I drug that is illegal […]

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As a franchisee, you will likely reach a point at which you are considering legal action against your franchisor. If you are fed up and ready to go to court, here’s what you need to know: 5 Preliminary Considerations for Pursuing a Claim Against Your Franchisor 5. Do You Have a Claim for Breach? In order to file a claim in arbitration or litigation, you need to have more than a general grievance. You need to have a legal cause of action, and this could be a breach of your franchise agreement. Although franchisors’ contractual obligations are usually limited, franchisees will usually still have several potential grounds to sue their franchisors for breach of contract. Some examples of common breach allegations in franchisee-initiated litigation include: Imposition of improper obligations or restrictions Failure to enforce territorial restrictions on other franchisees (territory encroachment) Breach of representations and warranties Improper refusal to renew or approve a transfer Improper use of advertising fund contributions 4. Do You Have a Statutory Cause of Action? If you don’t have a cause of action for breach, do you have a claim based on state or federal law. Franchise litigation often involves statutory claims such as: Antitrust violations State franchise law violations Discriminatory franchise practices Franchisor fraud Wrongful termination 3. What Does Your Franchise Agreement Say about Dispute Resolution? If you have a claim, your next step is to understand the implications of your franchise agreement’s dispute resolution clause. Does your agreement require mediation or arbitration; and, if […]

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If you flip through a typical Franchise Disclosure Document (FDD), most of what you will find is page after page of small, dense text that was clearly written by an attorney. However, things change (briefly) when you get to Item 20. In Item 20, franchisors are required to produce a series of five standardized tables that provide historical information, current information and future projections about the size and growth of the franchise system. Carefully reviewing the data in Item 20 can tell you a lot about a franchise system. Has it grown consistently over the past three years? Have franchisees been leaving the system on a regular basis? Is the franchisor focused on expanding through franchising or company-owned outlets? You can gain insight into these issues and more through Item 20 of the FDD. Breaking Down Item 20 of the Franchise Disclosure Document (FDD) 1. Systemwide Outlet Summary The first table in Item 20 is labeled, “Systemwide Outlet Summary,” and it simply compiles data from tables three and four.  Here you will find: The total size of the franchise system (including franchised and company-owned outlets) The net change in franchised outlets for each of the past three years The net change in company-owned outlets for each of the past three years All of this information is important for assessing the health of the franchise system as a whole, and the later tables provide information that is specific to your state. 2. Transfers of Outlets from Franchisees to New Owners (other […]

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As a franchisee, finding success means meeting customers’ demands while working within the confines of a franchisor’s business system. As market conditions change and new technologies emerge, franchisees can struggle when their franchisors fail to keep pace with the times, and they can incur unnecessary financial burdens when their franchisors choose to follow the wrong path. The following are five trends that are likely to impact franchisees – for better or for worse – during 2018. 5 National Trends (With Legal Implications) Likely to Impact Franchisees in 2018 1. Proprietary Apps and Online Ordering Certain franchised brands have emerged as leaders in the trend toward proprietary apps and online ordering. Several quick service and casual dining restaurants now offer tableside tablets for ordering food, and restaurants are increasingly encouraging customers to order online for instore pickup. When used effectively, these tools can streamline the customer experience and make it easier for franchisees’ employees to keep pace during periods of high demand. However, without thorough testing and a clear plan for implementation, they can confuse and frustrate customers, and they may be destined to become relics of the past. 2. Facial Recognition and Alternative Payment Options While alternative payment options – such as Apple Pay and PayPal – have been making online shopping easier for years, many brick-and-mortar concepts are just starting to incorporate these options into their point-of-sale systems. If your franchisor wants to offer alternative payment options (including use of facial recognition) in test locations or across the entire […]

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As a prospective franchisee, you have a handful of options when it comes to ways to finance your franchise. One of these options is a bank loan guaranteed by the U.S. Small Business Administration (SBA), which is commonly referred to as an “SBA loan.” While obtaining an SBA loan can help mitigate your financial risk as a franchisee, before you apply for funding, it is important to understand the terms, conditions and residual risks that these loans entail. If you are considering an SBA loan to finance your franchise, here is a brief introduction to what you need to know: 5 Important Facts about SBA Loans for Franchisees 1. An SBA Loan is Not Actually a Loan from the SBA. As we mentioned above, an SBA loan is not actually a loan from the U.S. Small Business Administration, but rather a loan from a private bank that works with the SBA. When you obtain an SBA loan, the SBA guarantees a portion of the loan, which means that the SBA will pay the bank if you are unable to do so. 2. The SBA Does Not Fully-Guarantee Franchise Loans. While the SBA will guarantee a significant portion of your loan, it will not guarantee your entirely. Depending on the amount you borrow, you may still need to personally guarantee 15 to 25 percent of the loan for your franchise. You will also need to make a down payment, and you may need to pledge assets as collateral. 3. In Order […]

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When you buy a franchise, your decision to move forward is largely based upon information provided by the franchisor. From marketing materials and sales pitches to the Franchise Disclosure Document (FDD) and franchise agreement, while you may receive information in multiple formats, all of these formats trace back to the same single source. Hopefully, the information you receive is up-to-date and not misleading. Hopefully, your franchisor is confident in its offering and wants you to make as informed of a decision as possible. Unfortunately, this is not always the case. As a result, it is important for both prospective and current franchisees to seek to verify their franchisors’ representations through other sources, whether that means going online, sending an email or picking up the phone. Where to Find Information About Franchisors and Franchise Opportunities If you need to find information about your franchisor or a franchise you are considering purchasing, these sources are a good place to start: 1. Current Franchisees Franchisors are required to disclose their current franchisees’ addresses and phone numbers in Item 20 of the FDD. If you have questions, there is a good chance that other franchisees in the system have either had the same question before or turned to other franchisees for help in other circumstances. As a result, you will often find that existing franchisees are more than happy to share what they know. 2. Former Franchisees The mandatory disclosures in Item 20 also include addresses and telephone numbers for franchisees who have left […]

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