Many successful business owners have at one point or another considered the notion of franchising their operation. And while franchises have the potential for substantial payoff, not all succeed. The risk-to-reward ratio simply may not be what the owner believes it is. Worse, some owners decide to franchise without knowing the legal duties that accompany the process. This may expose them to possibly ruinous litigation. Franchising your business is a major undertaking and should not be taken lightly. These are some questions you should ask an experienced lawyer:
What will I have to disclose to a potential franchisee?
With respect to franchises, Massachusetts is a non-registration state. That means franchisors are not required to register their franchises with the state before selling them. However, franchises are subject to certain regulations set forth by the Federal Trade Commission. This is where the Franchise Disclosure Document, or FDD, comes in.
The FDD discloses certain information to a potential franchisee, including:
- Background information about the franchisor and any parents, predecessors, and affiliates, including a description of the company and its history
- Biographical and professional information about the franchisors and its executives, directors, and officers
- Whether the business is or has been involved in any civil litigation or criminal court proceedings
- Details about any bankruptcy filings the business has made
- Franchise fees, including initial and ongoing
- The obligations that the franchisor will owe the franchisee
There are 23 detailed items to include in the FDD. Depending on the nature of your business, they can be tedious. Ask your attorney about what will be required to complete this step.
What is the franchise agreement?
Not to be confused with the FDD is the franchise agreement. While the FDD conveys certain required information about the franchise, the franchise agreement is the contract itself. In other words, it legally binds the franchisor and franchisee. This important document will contain such items as:
- Both parties’ legal obligations
- Licensing agreements for the use of the franchise’s intellectual property
- The term of the franchise relationship
- The payment of fees and royalties
- Dispute resolution terms
- How the franchise may be terminated
- Renewal options at the end of the franchise term
You will want to ask an attorney not only what needs to be included in this contract, but how terms can be drafted in a manner that best protects you.
How do I protect my intellectual property?
Brand recognition is what sets apart a successful franchise from other businesses. Those who purchase a franchise are buying into the brand and hoping that the market share it commands will pay off financially. But for the franchisor, this raises the question of how to protect the intellectual property that forms the foundation of the company’s brand.
Trademarks, service marks, and patents are some (but not all) types of intellectual property you need to make sure is protected before you franchise. This is where SederLaw’s multidisciplinary approach pays off for clients. Our firm’s Intellectual Property Law practice is ready to work with you to secure your intellectual property so you can franchise with confidence.
Ready To Serve Your Franchise
Franchises are exciting opportunities but should be pursued with deference to legal and business considerations. Seder Law’s Business & Corporate, Intellectual Property, and other practice groups are prepared to walk with you in your franchise journey. Connect with our team today.