Lawyer Tracy Jong
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IP FOR RESTAURANTS, WINERIES, AND MICROBREWERIES
RESTAURANT, WINERY, AND LIQUOR LICENSE LAW INFORMATION
A franchise allows a potential business owner to use a successful business model for the sale of goods and services. Franchises are regulated by both federal and state laws, and it is extremely important that you understand your rights and obligations before entering into any contracts. As with any decision, there are many points to consider before buying a franchise. Due to the complexity of this type of business transaction, it is best to engage an experienced attorney who can ensure that you are meeting all the legal requirements.
Learn More About Franchises:
Evaluating a franchise opportunity
A franchise is a huge endeavor to take on, one that can be very successful. That being said, it is important to make sure that the franchise you are trying to get into is legitimate and that it is as successful as it claims to be. A major reason for buying a franchise is the proven success of the name and operating method, but these should not be taken at face value. As the franchisee, you must do due diligence by researching the company and what it claims to provide. The following steps should be taken to evaluate any franchise opportunity:
Check the Better Business Bureau, Dun & Bradstreet and the internet to learn about the franchisor’s business reputation and financial stability.
Talk with other franchisees (about 5-10) to learn about their experiences with the franchisor and the franchise itself.
Determine the failure rate among franchisees and the reasons for failure. This could help you in what not to do, or it could signal that there is too much risk involved.
Find out what assistance the franchisor will provide. If this is the first business you will have owned, you may need more assistance in getting started, or you may feel more comfortable having a resource you can turn to with questions. Ask the franchisor what, if any, assistance is available for:
Public relations, marketing & advertising
Designing the store layout
Determining the location of the franchise
Regular visits by the franchisor for support/assistance
Find out if the franchise is registered in New York. Legitimate franchises will have registered with the state.
Determine the projected costs of opening your first location and what ongoing payments you will have to the franchisor. You should know the long-term financial cost of taking up a franchise. You should also ask about the renewal terms and costs.
Make sure that the deadlines to open are reasonable. The franchisor should give you enough time to find a site, negotiate a lease and complete any buildout. If you cannot find a location within the prescribed time period, make sure that the franchisor is willing to offer extensions.
Find out if there are restrictions on your other business activities (if any). Some franchises prohibit you from owning another business. Also determine if there are restrictions that affect other family members or business partners. You will also want to know if you limited to only one location.
You should find out if the territory is exclusive and protected. You may not want to enter a franchise agreement that allows multiple, competing franchises to do business in relatively close proximity with each other.
You will definitely want to know how you can terminate the franchise agreement, including what steps you are required to take and how much notice you must give. The future is unpredictable, so you should know what options you decide to get out the franchise. You should also know what happens if the franchise is not renewed at the end of the term – do you have the absolute right to renew? Do you get paid for your time and effort all those years? Can you continue in the business under another name?
Find out if the franchisor has a right of first refusal or restrictions on transfer. Some franchisors require that you sell to them or that they get to choose the buyer.
Find out what protection you have if you find your business is sued for something that is stated in the franchise manual but violates local law. Generally, you are responsible for making sure you comply with local laws, but will the franchise stand behind you and pay any legal bills?
Ask what happens if the franchise merges with another franchise to determine if you will be allowed to continue operating under the old format or what assistance they will provide to help with the transition.
Determine what control will you have over what merchandise is sold and at what price. This information is a good indication of how much freedom you will have to operate the franchise as you want, or, on the other hand, how limited you will be to use your own judgment and make your own decisions. Additionally, you will want to know if the franchise separately offers merchandise directly to consumers (for example over the internet or through a toll-free number) and weigh how that will affect your business.
Look for any market studies or demographic analyses. You will want to know if your merchandise will be successful in the area in which you are looking. For example, North Dakota or Seattle may not be the appropriate locations for an outdoor ice cream shop franchise, where common bad weather would impede business. Similarly, a franchise that sells camping equipment and other “outdoorsy” merchandise may not do so well in New York City.
Research your competition. Knowing how many competitors you may have to deal with can help determine whether this particular franchise or location is best for you.
Ask yourself if you are excited about the product. The most successful business owners are those who truly believe in their product or service. The energy you put into your business is communicated to your employees and customers.
Ask yourself if the return on investment (ROI) is acceptable. How fast do you need or want to recoup your investment? Do you hope to double your investment in five years? More? Is less acceptable?
Understanding your Franchise Disclosure Document (FDD)
The Franchise Disclosure Document (FDD) contains a wealth of information. One important piece of information (found at Item 20 of the FDD) is the names and contact information of other franchisees. You should inquire with several franchisees about the training and support experience both prior to launch (pre-opening) and after the opening (on-going). You should speak with “new” and “long-term” franchisees to assess whether this franchise opportunity is going to meet your needs and expectations. Without prying into the franchisee’s personal information, inquire whether the franchisees are satisfied with the profitability of the franchise. You should also ask questions that will help you determine if the franchise opportunity will realistically operate as you envision. Many franchisees are disillusioned at the day-to-day reality of operating the business. Be sure you know that what you are investing in will be compatible with your lifestyle and work style.
Franchise laws generally regulate the extent and type of information that a franchisor must supply a franchisee prior to entering a franchise agreement and a “cooling off” period before the franchisee can sign an agreement or make a payment. In New York, a franchisee must receive the required FDD at least 14 days prior to closing.
Franchise laws also prohibit certain sales practices and registration of the FDD, salespeople and franchise advertising.
Franchise law also provides certain protections to the franchisees by limiting the grounds for termination or non-renewal. They also require equal treatment (non-discrimination) of all franchisees and set forth notice and cure periods.
Franchisor: violating franchise laws
Franchise law violations can result in fines, permanent franchise bans, asset freezing, money damages for franchisee victims and jail time. Penalties can be to a franchisor legal entity as well as its officers, directors and managers. A court can cancel a franchise agreement and require the franchisor to return all monies to the franchisee(s).
Common violations include:
Failure to properly register the franchise
Failure to timely provide a purchaser a complete franchise disclosure document
Misrepresentations during the sale
Failure to renew a franchisee
Improper termination of a franchisee
It is important to be aware of your legal requirements as a franchisor in order to avoid unnecessary costly fines and penalties.
Franchises can be a family commitment
Investing in a franchise is a substantial business endeavor and will impact not only you but even your family. Most franchise agreements have non-compete provisions that extend to your spouse and children. Some franchise agreements extend to parents, grandparents and siblings as well. This will restrict their ability to freely participate in their own business venture.
For example, a recent client entered a franchise agreement in which her parents, her spouse’s parents and her brother-in-law, who owned several Chinese restaurants, were restricted from ownership or management in another “Asian” food business. This provision was a significant burden on many people other than the franchisee herself.
It is important to recognize that franchise agreements
negotiable. In her situation, we were able to negotiate a waiver of the standard contract clause so she could open a new franchise location for herself without affecting the extended family members’ ability earn a living.
Tracy P. Jong, Esq. |
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