Can Franchise Agreements Be Terminated or Not Renewed?

A Business FAQ with Mark A. Williams.

The simple answer is yes, franchise agreements can be terminated and that is pretty scary for somebody that owns a franchise business. The more complicated answer is that you have to look at your franchise agreement. Usually there are provisions in there that cover the renewal of the franchise and what happens if it is terminated.

There is also state and federal law that apply to franchises. In some states, the franchisor might not just be able to terminate your franchise even if the franchise agreement says they can.

Yes, franchise agreements can be terminated, they can be not renewed, but in almost every circumstance, whether it is by your franchise agreement or whether it is by law, you have some rights to renew and you need to make sure you pay attention to those rights when you get into a franchise relationship.

© 2014 Parsonage Vandenack Williams LLC

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What Law Governs Contracts With Foreign Entities?

A Business FAQ with Mark A. Williams.

The law that governs every contract is usually the law that the contract says. In  most agreements, there will be a provision in it that says if we get into a dispute, here is the law that is going to apply. If the contract does not say that, then there is a little bit of a problem. Every state has some laws and there are federal treaties with other countries, and those laws and treaties are supposed to work out whether it is the law of your state or whether it is the law of the foreign jurisdiction that is going to apply.

The important thing to think about is if you are going to do business with a company in another country, you really need to  make sure that in your contract, you specify what law is going to apply and what jurisdiction lawsuits are going to happen in so that if there is a dispute, you know how it can get resolved.

© 2014 Parsonage Vandenack Williams LLC

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What Happens When the Actions of a Franchisor Harm the Brand and Hurt the Franchisees?

A Video FAQ with Mark A. Williams.

The actions of the franchisor are going to be governed by a couple of things. First is the contract, so you need to look at your franchise agreement and see what responsibilities the franchisor really has to you. Second, if they are violating their responsibilities there are some overriding laws that apply to protect the franchisee. One of the questions that comes up is whether they are taking action to hurt you as the franchisee or are they taking action to hurt the entire franchise system and that is a pretty important distinction that you have to think about.

So, first off, consult your franchise agreement and if there is something in there that the franchisor is not doing, then you have a pretty clear claim to go to court and seek action against them. If it something beyond that, it is a fairly complicated system and you probably need to seek further legal guidance.

© 2014 Parsonage Vandenack Williams LLC

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What State Has Jurisdiction in Disputes Between Franchisors and Franchisees?

A Video FAQ with Mark A. Williams.

When you get into a dispute between the franchisor and the franchisee the first place to look is the franchise agreement. I would say in almost every circumstance that franchisor has written that agreement to include what state you have to go to and whether or not you can go to court or you have to go to arbitration. What you want to do if you get into a dispute is to check out your franchise agreement and see what it says. If it doesn’t have any provision, then you have to look at the law of your state to determine whether or not the courts would apply the law of your state or the law of another state. There are a lot of factors to make that determination.

© 2014 Parsonage Vandenack Williams LLC

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What Royalties Are Owed to a Franchisor?

A Video FAQ with Mark A. Williams.

A franchisor is only owed the royalties that are set forth in your franchise agreement. Typically those royalties are going to be a percentage of sales (gross sales that you make). If you sell $100 and you owe a 5% franchise royalty, you are going to have to pay $5 back to that franchisor. That is before you pay any of your employees, before you purchase your products, so when you look at a royalty payment, it is really important to sit down and look at what all of your overhead and expenses are to see if you can still afford to operate after the royalty.

The franchise agreement might set out other types of royalties. There might be initial franchise fees, there might be royalties that are on a sliding scale based upon the amount of sales that you make or you might have different royalties if you use other franchisees in other jurisdictions to sell products and services. You really have to look at your franchise agreement and make sure you understand all the royalties or payments you will have to make to that franchisor in order to operate the business.

© 2014 Parsonage Vandenack Williams LLC

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What Happens When My Franchise Agreement Terminates?

A Video FAQ with Mark A. Williams.

When your franchise agreement terminates you have to stop doing business. That is the first and foremost thing. Whatever the brand or system that came with that franchise, you need to stop doing it. If you continue doing it there are a whole host of claims the franchisor can make against  you.

Secondly, you are probably going to be subject to a non-compete as a part of your franchise agreement, and that means not only do you have to stop doing business the way that the franchisor wanted you to, you might have to stop doing business completely in that industry.

It is really important to read your franchise agreement and make sure you understand exactly what obligations you have once you stop doing business.

© 2014 Parsonage Vandenack Williams LLC

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What Disclosures Am I Entitled to When I Consider Buying a Franchise?

A Video FAQ with Mark A. Williams.

If you are looking to buy a franchise, you should receive something called a Franchise Disclosure Document. That is going to be a big document. Usually it comes in a 3-ring binder, almost like a book, and that is going to have the franchise agreement in it. It is also going to have a bunch of information about the operational history of the franchise. So they have to tell you things like how long they have been in business, whether other franchisees have sued them before and what kind of disputes they are in, how many franchises they have open and where they are located at. It is a document that has to be filed with the state. It is usually approved by regulators and it is there to make sure you have enough information to make an intelligent choice about whether you really want to buy into that franchise.

© 2014 Parsonage Vandenack Williams LLC

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What Are Some Advantages and Disadvantages to Franchising?

A Video FAQ with Mark A. Williams.

There are a lot of advantages and disadvantages to franchising. Some of the advantages include that you are buying a box, something that has already been proven–a strategy, a brand, a system. You can buy into a franchise with little or no experience in that area and have a successful business because you are trading on the brand that has already been created. Now, because of that the franchisor wants some things from you. They are going to want a fee up front, they are going to want royalty payments, they are going to restrict you to only operating the business the way that they want you to. There is usually very little flexibility to go outside of their system or even to sell other products or services on the side. Once your franchise is over, once it is terminated, you usually have to stop doing that business. So once you get into a franchise, you usually have to think about staying in it for the rest of your career or selling the business.

© 2014 Parsonage Vandenack Williams LLC

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FTC’s New “Business Opportunity” Rule Takes Effect

The FTC’s new Business Opportunity Rule took effect on March 1, 2012.  Companies currently adhering to the Interim Business Opportunity Rule should switch over to the new disclosure format immediately.  Although the new rule reduces the seller’s disclosure obligations (from 20 items to 5 items), the rule applies to more businesses than ever.  The new rule has expanded coverage to work-at-home businesses and other new enterprises covered under the interim rule.  Franchisors currently subject to the FTC Franchise Rule are exempt from compliance.

Under the new rule, a “business opportunity” is any commercial arrangement where the seller solicits prospective purchasers; purchasers are required to make a payment to obtain the business opportunity; and the seller represents that assistance will be provided regarding locations, accounts/customers, or with the repurchase of goods the purchaser makes.  On the new disclosure form, sellers must provide disclosures regarding: seller information; earnings claims; legal actions; cancellations or refunds; and a list of purchasers.

Sellers should remember that they may have to comply with state laws in addition to FTC rules.  26 states, including Nebraska, require similar disclosures by business opportunity sellers.  Sellers operating in these states will not only have to file disclosure documents with the FTC, but will have to make the state-required disclosures as well.

© 2012 Parsonage Vandenack Williams LLC

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