Do I need to Use a Franchise Attorney?

Yes, you should consult with a franchise attorney before entering into an agreement, and here are the reasons why.

Benjamin Franklin could be called the “American Father of Commercial Franchising.” In 1731, he and Thomas Whitmarsh agreed that Whitmarsh would open a printing business in Charleston, South Carolina.  Franklin sold paper and printing equipment to Whitmarsh while agreeing to a non-compete with Franklin.

The author of Poor Richard’s Almanac subsequently established similar relationships in multiple states (New York, Rhode Island, Pennsylvania, Massachusetts, North Carolina, and Georgia) and several countries (Antigua, Jamaica, Canada, and Great Britain). Thus, starting one of the earliest known examples of a franchise network.

From those early humble beginnings, franchising has evolved to become a tried and true, all-be-it complex, business model.  Franchising, implemented correctly, is a practical and efficient way for those who want to start a new business to connect with companies that seek to quickly expand their markets.

The franchisee (new business owner) gets the advantages of a brand recognition,  a turnkey business operation with ongoing assistance, and group purchasing power in most cases. The franchisor (the existing business owner) benefits from expansion with little capital, motivated ownership, and greater brand awareness.

Franchising, as an industry, did not come into its own until the 1950’s and 1960’s when brand names such as McDonald’s, Denny’s, Dunkin Donuts, Holiday Inn, H&R Block, and many other iconic businesses launched their own franchise networks.

Potential franchisees are often tempted to buy a franchise without legal assistance. Franchisor representatives make a good living gaining their prospects’ trust, sometimes asserting that the franchise agreement is non-negotiable: “It is what it is. We’re the experts running the business. Trust us.”

Franchise buyers are typically experienced businesspeople with the financial wherewithal to afford the startup costs of a new business. However, their acumen is generally limited to marketing, operational, and financial matters.

However, they often forget that, at its basic level, a franchise is a legal agreement that defines the relationship between the franchisor and the franchisee and binds both parties to its terms.  Those terms are often spelled out in one or more contracts and supporting legal documents, that are often extremely complex.

Moreover, due to unscrupulous practices engaged in by some franchisors during the franchising boom of the 1960’s and 1970’s the Federal Trade Commission stepped in establishing rules regarding pre-sale disclosures to potential franchisees that eventually evolved into today’s Franchise Agreement and Franchise Disclosure Document.

The most important reason to engage a franchise attorney is to help you review those complex legal documents and navigate the layers of regulation to determine if you are entering into the business agreement you think you are

Some franchise representatives might suggest that retaining an independent attorney is redundant, wastes time, and adds unnecessary costs.  A potential franchisee dealing with a franchisor without legal representations is akin to a baseball game where the visiting team accepts umpires employed by their opponent.

Many business owners have existing legal relationships and question if they really need to retain legal counsel experienced in franchise matters. Like many professions, attorneys tend to specialize in various aspects of the law. For example, some specialize in criminal matters, torts, patents and trademarks, or bankruptcies. Many focus on the issues of specific industries, including maritime, aviation, and real estate. Similarly, a subset of attorneys has practices centered around franchisors and franchisees. They are invaluable for those who are considering

• Buying a Franchise – The attorney will review the franchise disclosure document and franchise agreement initially to ensure it complies with Federal and State laws governing franchises. The engagement includes identifying and explaining the rights of both parties. This includes ways the agreement might affect the franchisee during operations and in the future. Finally, the attorney will make suggestions to improve the agreement in the franchisee’s favor and participate in negotiations with the franchisor.
• Selling a Franchise – Franchisees often need to sell their business due to retirement, illness, or seeking a new adventure. The transfer of ownership is usually dictated by the Franchise Agreement signed years before the sale was contemplated. To the franchise owner’s surprise, franchisors typically expect to have a major role in the sale, potentially limiting potential buyers and the terms of the sale. Occasionally, the interests of the two parties conflict. The attorney is most equipped to make a legal case on the franchisee’s behalf, resolving conflicts between the parties.
• There is a Dispute – Despite the rosy expectations of the franchisor and franchisees at the beginning of the relationship, problems can and do arise. In 2018, Forbes magazine reported that 45% of the 2,489 franchise systems surveyed had been sued by franchisees, forty-five having 50 or more suits in the preceding ten years. The figures do not include disagreements that were settled before a lawsuit was filed. All franchised business arrangements include possible conflicts of interest that can erupt in hard feelings and ruptured associations. A franchise attorney can advise the franchisee on the strength of their case, the possible solutions, and the likely outcomes.
• Franchising a Business – Sources suggest that 270-300 new franchisors appear worldwide each year, joining the more than 3,000 different franchise systems in the United States.  Growing through franchising is an effective strategy for many businesses. Its advantages include leveraging other people’s money to rapidly expand a physical footprint, reinforce the company brand, and discourage potential competitors. Hiring and managing onsite employees are off-loaded to franchisees while gaining scale in marketing and purchasing. The Harford Insurance Company suggest that the requirements of a successful franchise system include a superior product or service, an established, teachable business system, and a duplicatable business concept. An experienced franchise attorney can aid in the decision whether franchising is your preferred expansion option.

According to SBA estimates, more than 600,000 new businesses open per year in the United States at the rate of one every five minutes of  every working day (Mondays through Fridays). According to FRANdata, more than 750,000 franchise locations were operating in 2020.  New franchisees account for just under ten percent opened businesses opened each year.

On the surface, acquiring a franchise seems to make good business sense. Probably, few McDonalds, UPS Store, or Chick-fil-A franchisees are likely to complain about the outcome of their investment. Even so, not all franchisors, franchisees, or locations are equals; the best have their share of failure and disgruntled partners.

“Franchising is just a way of doing business; it’s not a script for success. The world is constantly evolving, and all of those ‘proven’ systems have to evolve, too. Proven success does not guarantee success tomorrow.
– – – – Robert Purvin

Some franchisors like to claim that their franchises have a better chance of long-term success than independent startups. However, there are no resent studies of continuity – existing after five years of operations – and past claims have been questioned. Still, Brian Headd, at the SBA’s Office of Advocacy in 2013, noted, “”A lot of things have to line up, and if they do, I feel in my heart a franchisee has a better chance of success than an independent startup. But there’s no guarantee of that.”

A competent Franchise attorney can help a potential franchisee avoid disasters of excessive enthusiasm, unwarranted trust, and unforced errors before, during, and after a franchise purchase. A franchise attorney’s job is to protect you. Today’s franchise attorneys have seen their clients succeed and  fail. Having a trusted advisor whose sole purpose is to protect your interests will greatly improve your chance for success as the owner of a franchise business.