3 Common Legal Issues Franchisors Have to Face and How to Avoid Them
Franchising is a well-established business model. Franchising creates more than twenty million jobs and contributes at least two trillion dollars to the economy. When you become a franchisee, you join a successful business and copy their business model as outlined in a contract. The franchisee gets to leverage a well-known brand identity, gets assistance with distribution and marketing, and may receive advice whenever questions arise. However, this is a complex business arrangement and there’s plenty of room for problems. Here are three common legal issues franchisors have to face and how to avoid them.
The Unclear Contract
When franchisors have a standard, uniform, and detailed contract that covers all possible concerns, they create a strong, reliable business ecosystem and consistent brand image across all franchises. Problems arise when a franchisor doesn’t address important issues in the contract, leading to legal disputes. Inconsistent application of rules can lead to accusations of favoritism. A contract that lacks clear lists of do’s and don’ts creates the possibility another franchise see could take rogue actions that jeopardize everyone else. For example, a mandatory contract that protects trade secrets and business secrets protects all franchisees.
At the same time, a cookie-cutter franchise agreement may fall short when the business expands beyond their home territory. Franchise law varies from state to state. Franchise attorneys will be able to explain the rules you’ll have to follow as well as verify that the franchise agreement you want to draft is valid for your state. For example, sixteen states have relationship laws that spell out the rights of franchisees in existing franchise relationships, and other states have rules that address specific industries. A franchise contract that conflicts with these laws can create headaches for the franchisee. State relationship laws may limit when franchisors can terminate the relationship and when the franchise must give you the opportunity to correct problems.
A Lack of Support and Monitoring
A franchisor should not simply sign the contract and collect the money. They should work with franchisees. This includes adequate systems of support for franchisees and monitoring their activities. This ensures that one franchise’s rogue actions don’t undermine the brand’s reputation, hurting every other franchise in the area. Everyone must know the aspects of the business the franchisor will be directly involved in and the communication channels that will be followed for these areas - and anywhere else the franchisee has questions.
Franchising goes far beyond marketing campaigns and menus. It typically includes business strategies, operating manuals, brand standards, and quality control. All of this costs money to create and distribute. Furthermore, the franchisee is expected to pay money to the franchisor to cover this in addition to their own operating expenses. There are typically two fees outlined in the franchise agreement. The first is the initial fee you pay for signing up and getting set up. The second is a continuing fee. This is often called a royalty. You should determine whether or not the required investments and pricing system are worth it. You need to run the numbers so that you can determine what pricing strategy you’ll use unless that is set by the franchisor.
Legal problems can cripple or kill a business, including franchises that are extensions of successful companies. Know the most common issues that arise and how to avoid them, and you’ll maximize your odds of succeeding.