Your Rights As The Franchisee While Buying A Franchise Business

Franchising is the magic wand that allows expansion of one’s business without making a capital investment and bearing the risk of liabilities. The franchisor licenses the franchisee to use his policies, procedures, logo, trademarks, intellectual property right and the right to sell his products and services in lieu of a fee. While the owner of the business gains from the penetration of the brand in newer markets and increased market share, the franchisee gains from low-risk investment and the profit generated from marketing an established brand. This is the reason why most entrepreneurs plan to buy a franchise for sale in the US to reap the benefits of a high-returns business model. Franchising became popular in the United States in the 1930s when Howard Johnson’s restaurant became a popular chain. It was further amplified in the 1950s with the U.S. Interstate Highway System coming into effect and food lovers making a beeline for fast-food.

The unabated growth of the sector can be gauged from the fact that there were approximately 744,437 franchise establishments operating in the country in 2017. Encouraged by the promise of President Trump to curtail labor regulations and the increasing purchasing power of consumers, the industry has been growing steadily for the past seven years. According to the latest report, the franchise sector added close to 1 million jobs in the US from 2012-17 with average employment growth of 2.6% annually. Giants like McDonald’s, KFC, Burger King, 7 Eleven, Marriott International, Dunkin Donuts, Pizza Hut and many more have expanded their reign all over the world. The estimated economic output of the domain was $713.2 billion in 2017. The figures for the industry speak volumes about its expanse and successful track record. If you too have been itching to buy a franchise for sale in Pennsylvania, then you got to know about your rights as the franchisee while making the big purchase. Here are the details of rightfully demanding your equity with fairness in the franchise system:

1. The FTC Franchise Rule

Federal Trade Commission (FTC), a consumer protection agency, controls franchising in the US at the federal level through the FTC Franchise Rule. The rule, established in October 1979, directs the covered franchisors to provide a complete disclosure of the information a prospective franchisee needs to buy a franchise for sale in California or any other state. The Franchise Disclosure Document (FDD) must be received by the prospective franchisee 14 days prior to the signing of the Franchise Agreement and payment of money. The prospective buyer has the right to ask for FDD once his/her application has been received and considered for sale by the franchisor. The FDD must have 23 items as per the rule elaborating details like franchisor’s background, business background, litigation history, bankruptcy history, initial and ongoing costs, supplier, territory and consumer restrictions, advertising and training, renewal, transfer and termination, franchise system information and more such relevant details. It should also have the most recent audited annual financial statements to comprehend the financial health of the business.

2. State Level Regulations

The FTC rule applies to all the 50 states, US territories and protectorates and does not need any federal registration. However, 15 states have registration law, and franchisors operating in these areas must be registered before putting up a franchise for sale. Only Oregon exempts businesses from the registration rule. The 14-day cooling off period differs in few of the states. In addition, 26 states regulate the offer and sale of business opportunities. In conclusion, the FTC Franchise Rule along with the state franchise registration and disclosure laws and the business opportunity laws govern the offer and sale of franchises. Besides these, 21 states have the franchise relationship laws which regulate issues like renewal, transfer, termination and sourcing.

3. Obligations For Both Parties

Though the FTC does not bind the franchisee and franchisor in any federal obligation rule, certain states have the good faith and fair dealing obligation as part of the relationship laws. In addition, certain states have made it unlawful for the franchisor to unfairly compete with the franchisee in an area when no exclusive territory has been granted. The application and scope of the laws vary from state and state. The covenant of good faith does not override the federal and state laws and the roles and responsibilities of both the parties defined in the Franchise Agreement. It only specifies that both parties must work honestly and fairly and as per the signed contracts.

4. Franchisee Right Of Action

As per the federal rule, there is no right to action available to the franchisee in case of a violation of the rule for failure to fulfill the disclosure requirements or for fraudulent selling practices. However, some of the states have voted for statutes that extend the right of action to the franchisees when a fraudulent activity is proven. The aggrieved franchisee may get the defaulter franchisor to pay monetary damages or get a recession of the Franchise Agreement. To protect the franchisee from third-party claims on the franchisor, the agreement must specify the franchisee as an independent contractor and not an agent of the franchisor.

5. Franchise Agreement

The contractual agreement describes the rights and obligations of both the parties and the terms of their relationship such as length of the contract and renewal, identification of the location of the unit, each party’s right to terminate the agreement, post-termination responsibilities and more. It must clearly provide information about the role of the franchisee in development of the business and the entire fee (initial, advertising and royalty) to be paid during the length of the contract. It should also talk about dispute resolution. Additionally, the Franchisor Operations Manual will have all the details regarding the policies and procedures of the business. The franchisor can alter the policies unilaterally to modify systems. However, the franchisee intending to purchase a franchise for sale in Texas or any other state can challenge these changes if they are unreasonable or impact the rights or obligations of any of the two parties.

Endnote

The disclosure document and the agreement are both informative documents for assessment of the business and its reputation. The prospective buyer willing to purchase a franchise for sale in the US must take advice from accountants and lawyers to understand their obligations and financial standing of the franchisor. The laws further protect the interests of the franchisee. Thus comply with the rules to become a part of a successful franchise network.