Franchise Law: What Franchisors and Franchisees Should Know

Whether you are interested in becoming a franchisor or a franchisee, it is important for you to understand basic franchise law and to consult a franchise lawyer for assistance with any legal documents.

Franchising has to be carefully regulated. Without such regulation, conflicts are bound to develop between the franchisor and franchisee, effectively undermining the operation of the franchise. However, it is not enough to simply regulate the varied aspects of franchising. The different parties have to make sure they understand all the aspects of franchise law that pertain to their agreement. They must make sure they are getting the best deal possible under the circumstances. After all, they are all in the endeavor to make a profit. It would be naïve and potentially financially disastrous for each party to assume that the other party’s lawyer had its best interests in mind.

 

Franchise Law and the Franchising Agreement

 

“Location” is just one aspect of franchising that is governed by franchise law. For a franchising agreement to be written up, a number of decisions have to be made regarding the location of a given franchise unit. Some of these will be determined by the law while others will be determined by the parties to the agreement. For instance, it has to be decided whether the franchisor or the franchisee will be responsible for locating the unit’s site. It also has to be determined whether to grant the franchisee the right to move the franchise unit if the building hosting it is condemned, if the business does not thrive as expected or if the lease expires.

Often, buying a franchise grants the franchisee exclusive rights within the territory in which his or her franchise unit is located. Typically, the franchisor is not allowed to sell a franchise unit to a second franchisee within the same territory as long as the first franchisee is still operating there. The precise rules governing such details depend on prevailing franchise law. However there is also some room for flexibility, giving the franchisor and franchisee the opportunity to negotiate over some of the features of the agreement.

Another important issue that will come up during franchising is trademark. A savvy franchisor will register his or her trademark long before trying to sell the first franchise unit. In so doing, the franchisor can avoid endless legal battles with other business entities that subsequently try to claim ownership of that trademark. The franchising agreement between the franchisor and the franchisee should cover trademark-related issues in detail. It should describe the trademark protections in place. It should also describe the steps that the franchiser and franchisee will take in the event of legal conflict with a third party concerning the trademark.