A franchise is a license to use an existing business’ name, products and trademark. The party that grants the franchise is a franchisor, while the one purchasing it is a franchisee.
Franchises are a convenient way for someone to begin a business. After all, the franchisor supplies or communicates everything needed to run the business. Keep in mind that starting a franchise requires a dedicated commitment of time and money.
Fortunately, we provide legal services necessary to franchise your business at Harold Kestenbaum PC. That way, you will be aware of the restrictions, obligations, and costs of being a new franchisor. While it might be tempting to jump into an opportunity, you must be sure to have the following essential documents.
Franchise Disclosure Document
Preparing a Franchise Disclosure Document or FDD must comply with FTC and some state regulations. You and a qualified franchise lawyer should prepare this document, which should comprise and address the 23 varied disclosure items mandated by the FTC.
Legally, you cannot sell a franchise until you give the potential franchisee an FDD. Actually, 15 states expect franchisors to register the document with the state or inform them that they will provide franchises with the document before they conduct any sales activity in the state.
This document’s major role is to offer franchisees the information needed by franchise law, and it includes information on the company’s leadership, litigation and bankruptcy history, ongoing and initial fees as well as comprehensive information concerning the proposed franchise relationship.
If you’re wondering how to go about handling the FDD, Harold Kestenbaum can advise you.
Equally vital to your FDD, the operations manual will be crucial to the operation and launch of your franchise system. An operations manual involves stipulated standards, principles, and rules for your business system. It must explain in detail each facet of business protocol, including mission statement, closing guidelines, and daily operations.
It should be grammatically correct, well written, and edited thoroughly because many people will examine it for information. Although these components and actual content will likely vary for each business, they are standard elements of the manual.
Although it will have legal implications, the manual is not a legal document and won’t be registered with or disclosed to any government agency. Remember, your manual should be confidential and disclosure should only take place among your franchisees.
The Franchise Agreement
This document is very important because it details the legal obligations for the franchisee and franchisor. Furthermore, it is the contract for the transaction and delineates royalties as well as startup fees and other fees that need to be paid to the franchsior.
Keep in mind that it can be lengthy and very complex, so both parties should seek legal advice from attorneys specializing in franchising. Seeking legal advice will ensure that you are fully aware of your obligations. It’s also important to engage a business lawyer because the document features sensitive information. The key terms in the document include:
• Payment provisions: The agreement will typically require the franchisor to obtain different payments throughout the franchise. They are typically the ongoing royalty fee, initial sum, and advertising fee.
• Intellectual property: This concerns any patents, trademarks, or copyrights for services/products and how the franchisee should employ them in the franchised business.
• Accounting records: If the franchisor expects a royalty fee, the agreement should have comprehensive provisions concerning the franchise’s accounting formalities. The franchisee would have to ensure regular auditing of the franchise and records maintenance.
- Have more questions about franchising? Check out our Franchise FAQs page.
Although franchising can seem like an ideal type of business expansion for entrepreneurs, not all businesses should franchise. Furthermore, it’s important to understand the documents you need before venturing into this business model. If you don’t know where to start, contact Harold by filling on a contact us form or call Harold Kestenbaum at 516-745-0099 for expert guidance.