Can I sell my franchise to someone else?

Posted on December 3, 2015 by mboxerman

Acquiring a franchise grants you several important branches in the property rights bundle of sticks. Chief among these is your right to re-sell your franchise. Franchise agreements that place absolute barriers on your right to sell your franchise are void as against public policy favoring franchisee transfer rights. But that does not mean you are free and clear to re-sell your franchise with no input or oversight from the franchisor.

Almost all franchise agreements will vest the franchisor with a right of first refusal, which means the franchisor has the first (and last, in practice) opportunity to purchase it from you when you want to sell your franchise.  In practice, a franchisor can invoke its right of first of refusal once you present them with a written offer from a third party to purchase your franchise. The franchisor then has the right to approve or disapprove the third party or to match the third party offer with one of its own.

In addition to the right of first refusal, many franchisors also impose transfer fees.  These fees can be thousands of dollars, and some franchisors require additional fees for the mandatory training of new franchise owners.  Even if the franchisor does not retain a right of first refusal or impose transfer fees, keep in mind that you may have to compete with your franchisor when you’re looking for a buyer if they are still actively seeking franchisees.  This can make it harder to find someone interested in purchasing your particular franchise or force you to accept a lower offer.

In negotiating your franchise agreement, you hopefully hired an experienced franchise lawyer to represent your interests. He or she can review your franchise agreement with you, explain your rights and restrictions in selling your franchise, and help you negotiate for the best possible terms.

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Can I negotiate the franchise fee?

Posted on December 3, 2015 by mboxerman

While many aspects of the franchise agreement are completely negotiable, franchise fees often are not. Federal law requires that franchisors notify all prospective franchisees of any material change given to any prospective franchisee. So if the franchisor negotiates a new franchise fee with one prospective franchisee, they have to then disclose that to all other prospective franchisees, which can cause delays and frustration in the negotiating process.

Although most franchisors will not negotiate on the franchise fee, that does not mean you cannot negotiate to get more bang-for-your-buck. An experienced and skillful franchise lawyer can often negotiate with the franchisor to get you larger territorial rights or more franchise training programs.

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What is a franchise agreement?

Posted on December 3, 2015 by mboxerman

A franchise agreement is a binding contract between franchisee and franchisor that reflects the mutual obligations each owes to the other. The franchise agreement governs the entirety of the relationship between the franchisee and franchisor and contains all of the essential terms that set forth each party’s rights and responsibilities.  Both the franchisor and franchisee are required to sign the document before their formal franchise relationship begins.  The terms of a franchise agreement generally include:

  • Franchise Fees
  • Estimated Costs
  • Duration of the Contract
  • Location and/or Protected Territory
  • Training Programs
  • Franchisee Support Systems
  • Applicable Financing Programs
  • Obligations of Both Parties
  • Multi-Unit Rights
  • Trademark Rights
  • Advertising and Marketing
  • Equipment
  • Proprietary Systems and Products
  • And More

Franchisors should note that there is no standard form for franchise agreements because so many types of businesses are franchised.  The needs of a coin-operated laundry facility are drastically different from those of a fast food restaurant, so the terms and conditions of franchise agreements for those businesses must be drastically different as well.  As a result, it’s important for franchisors to make sure the terms of their franchise agreements are tailors to the specific needs of their business.

Franchisees should remember that franchise agreements are binding legal documents that are not to be taken lightly.  The amount of bargaining power you have depends on the specific franchise you are entering into, but you always have the right to negotiate with the franchisor if you are not happy with the terms offered.  If you still have questions about the franchise you’re buying into, make sure those questions are addressed before signing.

Regardless of whether you are selling a franchise or looking to buy, it is important that you hire an experienced franchise lawyer to look over your agreement and negotiate its terms before you make a formal agreement.

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What is a franchise lawyer?

Posted on December 3, 2015 by mboxerman

A franchise lawyer is an attorney who possesses the unique knowledge and skill required to help facilitate the purchase, sale, formation, and success of new and established franchises. A franchise lawyer representing a franchisor can help prepare and draft Franchise Disclosure Documents, Franchise Agreements, and state-required filings needed to legally offer and sell a franchise. When representing a prospective franchise purchaser, a franchise attorney will review the Franchise Disclosure Documents and negotiate the Franchise Agreement to help the purchaser establish their new franchise.

There are more than a million attorneys in the United States, but most of them do not focus on franchise law.  Franchise lawyers regularly create, negotiate, and review documents that are specifically used for franchising and are able to quickly spot issues for both franchisees and franchisors.  Hiring an experienced franchise attorney provides you with an advocate who knows what to look out for during both initial negotiations and any potential disputes.

A good franchise lawyer is both master and jack of-all-trades. The franchise lawyers at Marcus & Boxerman provide the highest caliber legal services, combining knowledge, experience, and skill in not only franchise law, but also business entity formation, employment and labor law, corporate and business transactional law, and commercial litigation and dispute resolution.

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Are franchise laws regulated by the federal or state government?

Posted on December 3, 2015 by mboxerman

Franchisees in Illinois have to play by an intricate set of rules encompassing regulation by both state and federal government, which both impact franchise laws.

In Illinois, the sale of a franchise is regulated by the Illinois Franchise Disclosure Act of 1987 (the “Act”). Before selling a franchise, the seller must register the franchise with the Illinois Attorney General, pay a $500 registration fee, file a Franchise Disclosure Document with Illinois Addenda, and file related documents including a Uniform Franchise Registration Application, Franchisor’s Costs and Sources of Funds, Uniform Consent to Service of Process, Franchise Seller Disclosure Form, Guarantee of Performance, and Consent of Accountants. But franchisors aren’t off the hook after the initial registration; the Act requires franchisors to file an annual report, updating their disclosure statement with any material changes. Failure to comply with the Illinois Franchise Disclosure Act can result in criminal prosecution and civil penalties of up to $50,000 per violation.

The federal government doesn’t regulate the franchise/franchisor relationship or require registration, but the Federal Trade Commission’s Franchise Rule does require franchisors to provide prospective franchise purchasers with a Franchise Disclosure Document at least ten days before sale that gives the purchaser material information on 23 different subjects that bear on the transaction.  The Federal Trade Commission’s Franchise Rule does not preempt state franchise laws unless the state laws fail to provide franchisees with protection that is equal to or greater than the protection offered by the FTC Rule.  In other words, the FTC Rule sets a minimum standard for franchise disclosure documents, and states are permitted to add additional protections by requiring more extensive disclosures if they see fit.

An experienced franchise law specialist can help you navigate the endless sea of state and federal rules and regulations so you can focus your attention on the success of your business.

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What is a Franchise Disclosure Document (“FDD”)?

Posted on December 3, 2015 by mboxerman

A Franchise Disclosure Document (FDD) is a complex legal document that the Federal Trade Commission (FTC) requires franchisors to provide to potential franchisees before entering a formal franchise agreement.  Franchise Disclosure Documents protect potential franchise buyers by providing them with comprehensive information about the franchise up front.  The information in Franchise Disclosure Documents helps potential franchisees make informed decisions and choose a franchise that makes sense for their specific needs.

The FTC requires franchisors to give potential franchisees “material information, including background information on the franchisor, the costs of entering into the business, the legal obligations of the franchisor and the franchisee, statistics on franchised and company-owned outlets, and audited financial information.”  Additionally, if franchisors choose to make any representations about financial performance, the FTC requires that the franchisors make certain disclosures and provide substantiation for those representations.  This ensures that the representations made are realistic and not misleading to potential franchisees.

Franchise Disclosure Documents contain information on 23 different subjects, including:

  • The Franchisor, its Predecessors, and its Affiliates
  • Business Experience
  • Litigation
  • Bankruptcy
  • Initial Franchise Fee
  • Other Fees
  • Initial Investment
  • Restrictions on Sources of Products and Services
  • Franchisee’s Obligations
  • Financing
  • Franchisor’s Obligations
  • Territory
  • Trademarks
  • Patents, Copyrights and Proprietary Information
  • Obligation to Participate in the Actual Operation of the Franchise Business
  • Restrictions on What the Franchisee May Sell
  • Renewal, Termination, Transfer, and Dispute Resolution
  • Public Figures
  • Earnings Claims
  • List of Outlets
  • Financial Statements
  • Contracts
  • Receipt

Franchise Disclosure Documents can be hundreds of pages long and the information is often written in complex legalese that can be difficult to decipher. It’s important that prospective franchise owners hire an attorney specializing in franchise law to review the FDD. Franchise law specialists know what to look for in the Franchise Disclosure Document and have the experience necessary to guide you in your new franchise investment.

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