Information About Franchise Agreement
The franchise agreement is the cornerstone document of the franchisee--franchiser relationship. It is this document that is legally binding on both parties, laying out the rights and obligations of each. A sample agreement may either be attached to the disclosure statement or presented separately. Either way, you are entitled to receive it as a prospective franchisee five business days before signature. You should have it reviewed by a lawyer familiar with franchise matters--especially since most agreements are extremely one-sided in favor of the franchiser. No one should enter into a franchise and expect to have an evenly drawn contract.
What's in a Franchise Agreement?
The agreement will contain provisions covering, in considerable detail, the obligations of the franchiser (the company) and franchisee (you) regarding operating the business; the training and operational support the franchiser will provide (and at what cost); your territory and any exclusivity; the initial duration of the franchise and any renewal rights; how much you must invest; how you must deal with things such as trademarks, patents and signs; what royalties and service fees you will pay; tax issues; what happens if you should want to sell or transfer the franchise; advertising policies; franchisee termination issues; settlement of disputes; by the company, operating practices, cancellation, and attorney fees.
There is no standard form of franchise agreement because the terms, conditions, and the methods of operations of various franchises vary widely depending on the type of business involved. For example, franchises for printing, employment agencies, and automotive products will differ from the franchises for fast food service, convenience stores, or clothing.
Can I negotiate the franchise agreement, or is it "take it or leave it?"
In almost every franchise agreement there are terms that can be negotiated – perhaps price, timing of payments, duration of the franchise, the number of people they will train, and territorial exclusivity -- and some that probably cannot be negotiated, such as trademark issues. However, much depends on the relative bargaining position of the franchiser and you as a prospective franchisee, and how astute your lawyer is. Also, you should note that many registration states do not permit a contract to be signed other than the one on file. (However, New York is an exception, in that the state allows a franchiser to give a franchisee a better contract than one that is on file.)
As a first step, make sure the statements in the franchising agreement are consistent with the representations made in the disclosure material. Careful examination of the agreement to verify that what the offering circular promises is contained in the agreement is the first step in the process.
What can I negotiate?
That varies all over the lot. If you want to buy a McDonald's franchise, don't expect McDonald's to modify the agreement's provisions regarding how you can use its Golden Arches trademark, nor should you expect them to allow you to sell Sushi. However, the company may permit you to send more people to its training sessions, or allow you to adjust the size of the signs to meet local zoning ordinances. On the other hand if you will be buying the second "Tony Martin Pizza Factory" franchise, you'll probably have much more negotiating room.
If you review the proposed legal contract with a lawyer you will learn that even certain of the provisions which appear to be "boiler-plate" can be changed, if it is important to you, and not significant to the franchiser. A lawyer can also help you anticipate problems that may arise (e.g. location, equipment, pricing, competition, new products) during the life of a contract, and perhaps solve some now, saving you time, money and headache later. Agreed modifications should be in written, not oral, form.
Can the franchise agreement be terminated or not renewed?
This generally will depend on what the franchise agreement you signed says, whether or not you have complied with it, and whether the franchiser did all that it had promised to do in the agreement.
At the outset, franchisers generally have the right to choose the parties they wish to do business with and may use their own judgment in entering into a new franchise relationship. After the period covered in the franchise agreement, and subject to your rights to renew, you will be in a negotiating session with the franchiser over extending the franchise.
If you have failed to comply with the agreement, you can expect that the franchiser will not be pleased about the prospect of having you continue with the arrangement. In fact, even before the original term is over, the franchiser may seek to terminate your franchise – as a McDonald's franchisee who starts selling Sushi would soon find out.
Depending upon the appropriate state law, a franchiser may have the right to terminate a franchise or to refuse to renew a franchise for "good cause" – such as failure to meet sales quotas or lack of quality standards. Many contracts are drafted in such a manner that it is probable that a franchisee would breach it at sometime allowing the franchiser to cancel the contract or not renew it. Some state statutes require specific conditions, such as failure to meet monetary obligations, correct defects, or quality standards, for termination or for non-renewal. Other states also require special notices within certain time periods be provided to the franchisee before termination or non-renewal.
The law prohibits the sale of a franchise by way of any communication that contains an untrue statement of a material fact or fails to state a material fact that should be stated. Generally, a "material fact" is one that a reasonable person would believe to be important in making a decision on whether to buy a franchise or not the transaction. Such a fact might be that X% of the company's franchisees have gone bankrupt, as a reasonable person would find this information important in making a decision to purchase a franchise. If a material fact is omitted by a franchiser, a franchisee may bring legal action to recover damages.
Do state laws and rules for franchises differ?
Yes, which is why it is so important to deal with an attorney familiar with franchising generally and your state's laws in particular. Some states have rather strict franchise regulations others do not. For example California, Hawaii, Illinois, New York, Rhode Island have enacted "franchise registration" statutes governing sales practices. Other states, including Florida, Georgia, Iowa, Kentucky and North Carolina regulate franchising through "business opportunity" acts. A few states, such as Connecticut, Michigan, Minnesota and South Dakota have both. Maryland, Arkansas, California, Illinois, Iowa, and Minnesota are among the states with laws regulating termination and non-renewals of agreements. And proposed ads must be pre-approved in California Illinois, Indiana, and Maryland prior to publication.
What's in a Franchise Agreement?
The agreement will contain provisions covering, in considerable detail, the obligations of the franchiser (the company) and franchisee (you) regarding operating the business; the training and operational support the franchiser will provide (and at what cost); your territory and any exclusivity; the initial duration of the franchise and any renewal rights; how much you must invest; how you must deal with things such as trademarks, patents and signs; what royalties and service fees you will pay; tax issues; what happens if you should want to sell or transfer the franchise; advertising policies; franchisee termination issues; settlement of disputes; by the company, operating practices, cancellation, and attorney fees.
There is no standard form of franchise agreement because the terms, conditions, and the methods of operations of various franchises vary widely depending on the type of business involved. For example, franchises for printing, employment agencies, and automotive products will differ from the franchises for fast food service, convenience stores, or clothing.
Can I negotiate the franchise agreement, or is it "take it or leave it?"
In almost every franchise agreement there are terms that can be negotiated – perhaps price, timing of payments, duration of the franchise, the number of people they will train, and territorial exclusivity -- and some that probably cannot be negotiated, such as trademark issues. However, much depends on the relative bargaining position of the franchiser and you as a prospective franchisee, and how astute your lawyer is. Also, you should note that many registration states do not permit a contract to be signed other than the one on file. (However, New York is an exception, in that the state allows a franchiser to give a franchisee a better contract than one that is on file.)
As a first step, make sure the statements in the franchising agreement are consistent with the representations made in the disclosure material. Careful examination of the agreement to verify that what the offering circular promises is contained in the agreement is the first step in the process.
What can I negotiate?
That varies all over the lot. If you want to buy a McDonald's franchise, don't expect McDonald's to modify the agreement's provisions regarding how you can use its Golden Arches trademark, nor should you expect them to allow you to sell Sushi. However, the company may permit you to send more people to its training sessions, or allow you to adjust the size of the signs to meet local zoning ordinances. On the other hand if you will be buying the second "Tony Martin Pizza Factory" franchise, you'll probably have much more negotiating room.
If you review the proposed legal contract with a lawyer you will learn that even certain of the provisions which appear to be "boiler-plate" can be changed, if it is important to you, and not significant to the franchiser. A lawyer can also help you anticipate problems that may arise (e.g. location, equipment, pricing, competition, new products) during the life of a contract, and perhaps solve some now, saving you time, money and headache later. Agreed modifications should be in written, not oral, form.
Can the franchise agreement be terminated or not renewed?
This generally will depend on what the franchise agreement you signed says, whether or not you have complied with it, and whether the franchiser did all that it had promised to do in the agreement.
At the outset, franchisers generally have the right to choose the parties they wish to do business with and may use their own judgment in entering into a new franchise relationship. After the period covered in the franchise agreement, and subject to your rights to renew, you will be in a negotiating session with the franchiser over extending the franchise.
If you have failed to comply with the agreement, you can expect that the franchiser will not be pleased about the prospect of having you continue with the arrangement. In fact, even before the original term is over, the franchiser may seek to terminate your franchise – as a McDonald's franchisee who starts selling Sushi would soon find out.
Depending upon the appropriate state law, a franchiser may have the right to terminate a franchise or to refuse to renew a franchise for "good cause" – such as failure to meet sales quotas or lack of quality standards. Many contracts are drafted in such a manner that it is probable that a franchisee would breach it at sometime allowing the franchiser to cancel the contract or not renew it. Some state statutes require specific conditions, such as failure to meet monetary obligations, correct defects, or quality standards, for termination or for non-renewal. Other states also require special notices within certain time periods be provided to the franchisee before termination or non-renewal.
What if the information given to a prospective franchisee in the disclosure agreement is misleading or fraudulent or incomplete?
The law prohibits the sale of a franchise by way of any communication that contains an untrue statement of a material fact or fails to state a material fact that should be stated. Generally, a "material fact" is one that a reasonable person would believe to be important in making a decision on whether to buy a franchise or not the transaction. Such a fact might be that X% of the company's franchisees have gone bankrupt, as a reasonable person would find this information important in making a decision to purchase a franchise. If a material fact is omitted by a franchiser, a franchisee may bring legal action to recover damages.
Do state laws and rules for franchises differ?
Yes, which is why it is so important to deal with an attorney familiar with franchising generally and your state's laws in particular. Some states have rather strict franchise regulations others do not. For example California, Hawaii, Illinois, New York, Rhode Island have enacted "franchise registration" statutes governing sales practices. Other states, including Florida, Georgia, Iowa, Kentucky and North Carolina regulate franchising through "business opportunity" acts. A few states, such as Connecticut, Michigan, Minnesota and South Dakota have both. Maryland, Arkansas, California, Illinois, Iowa, and Minnesota are among the states with laws regulating termination and non-renewals of agreements. And proposed ads must be pre-approved in California Illinois, Indiana, and Maryland prior to publication.
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posted by peterdj | 4:01 AM
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