Frequently Asked Questions

• What is franchise law?

Franchise law is a combination of federal and state laws that regulate the registration, offer and sale of franchises, and in some states the legal relationship between franchisors and franchisees.  These laws were enacted to stamp out fraud in the franchise marketplace and to protect franchisees.  Franchise law also includes the power granted to federal and state administrators to investigate franchise sales fraud and illegality, institute civil proceedings, and in some states, institute criminal proceedings as well.

• What information (franchise disclosures) is required by law?

The federal and state laws require franchisors to provide a franchise disclosure document (FDD) to prospective franchisees containing all information necessary for them to make an informed decision regarding the purchase of a franchise.  This is required before any franchise-related agreement is signed and before any money is paid.  The FDD has 23 federally regulated items of disclosure which include background about the franchisor and the industry, litigation and bankruptcy disclosures; financial disclosures, the franchise agreement, other agreements that would apply to that particular franchise, and audited financial statements of the franchisor.

• What is a franchise law firm?

A franchise law firm is one that has their specialty, focus, and expertise in assisting franchisees.  At Luther Lanard, we have the knowledge and familiarity with all aspects of franchise law, the pitfalls to look out for in purchasing a franchise, and can also provide counsel in any potential conflicts with the franchisor that may arise at any point in the franchise relationship.  Other services we provide are lease review, entity formation; and acquisition or sale of franchise businesses.

• What are franchise relationship laws?

Twenty states, the US Virgin Islands, and Puerto Rico have enacted franchise relationship laws.  These statutes address when and under what circumstances a franchisor may terminate a franchise agreement, deny a transfer or refuse to renew a franchise, the minimum advance notice of franchise termination or expiration that must be given to franchisees.  Some state’s relationship laws also include other aspects of the franchisor-franchisee relationship, such as fair dealing, discriminatory treatment, market protection, and pricing. 

• What are the advantages of starting a franchise?

The relative ease of investing in a franchise opportunity versus building a brand new business from the ground up is an attractive prospect for many entrepreneurs.  Further, many franchise systems have established strong brands that appeal to consumers. 

• What are some questions to ask when starting a franchise?

There are many questions you should ask when looking into a franchise opportunity.  Some of these include: How long has the franchisor been in business?  How many total units does the franchisor currently have nationwide?  Is the franchisor in your region?  What are the franchise fees, royalty percentage fees, and ad fund percentage fees (how much of your revenue will be paid to the franchisor for marketing)?  What is the estimated start-up capital needed?  How well have franchisees performed both in terms of revenues and expected profits? What are the key support elements (how the franchisor will be providing training and support to you)?

• What are three reasons to buy a franchise instead of starting a new business?

1. As a franchisee, you have built-in brand and trademark awareness that often already have an established reputation of quality and uniformity, and even emotional attachment in the view of the public.
2. The ease and peace of mind of being able to follow an already well-developed and proven business model, the franchise system, and training and support provided by the franchisor.
3. The benefits of having access to the marketing savvy that is usually only available for larger enterprises, which includes, in more mature franchise systems, a built-in customer base.

• How does somebody get money to start a franchise?

The financing for a franchise is the same as for any small business.  You may utilize a retirement account, pull equity from your home, find business partners, pursue a traditional bank loan or a small business loan.  Additionally, some franchisors will lend you the money needed to purchase a franchise.

• What research should I do before starting a franchise?

1. Speak to other franchisees who are already in the system.  There is a full list of all franchisees in a particular system in their FDD.  You may call these franchisees and ask any questions you want without permission of the franchisor.
2. Read through the 23 items of disclosure in the FDD.  It contains vital information about the franchise and is required to be written in plain English for you to understand.
3. Have the franchisor’s audited financial statements evaluated by a good business accountant.  This can protect you from being in a situation where the franchisor goes into bankruptcy, which could leave you in a very bad position.

• How do I start a franchise in California?

1. Start by researching franchises.  You can do this on websites such as Franchise Direct, Franchise Business Review, or go through a broker to help you narrow down which franchise opportunities are a good fit for your interests, skillset, and the amount of time you personally want to invest in the day-to-day operations of the business, et cetera.
2. Once you have narrowed down a franchise you are interested in, contact them and go through their discovery process.  The franchisor should provide key information, such as insights into their industry, that particular franchise system’s competitive advantages, provide their FDD and the franchise agreement, a territory and/or market analysis, any licensing that might be needed, and more.
3. Have the FDD reviewed by a reputable franchisee lawyer (Luther Lanard)!
4. Hire an accountant to review the audited financial section of the FDD and advise you on tax related issues for your business.
5. Obtain the financing, if needed, and sign your franchise agreement.
6. Set up your business entity.
7. Attend the franchisor’s start-up training and begin any licensure processes.
8. If needed, Luther Lanard can also help with any lease review/negotiations for your business and the purchase of an existing franchise unit.

• How do I choose a franchise lawyer?

Choosing the right lawyer is critical.  Lawyers specialize in many different areas of law and you want one that has the expertise in franchise law specifically.  It’s important to choose a lawyer who is well versed in franchising and franchise law.  It also is preferable to get an attorney who only represents franchisees as the attorney can zealously advocate for you.  

• How much does a franchise lawyer cost?

Franchise lawyers can vary in how expensive they are. But a good franchise law firm, even if they charge more than a business lawyer, will likely be worth the additional expertise and the fact that the franchise lawyer can be more efficient having already learned the area of law.  Also, franchise lawyers often already have experience with the franchise system you are interested in or are already in. 

• What does a franchise lawyer do?

At Luther Lanard, we will check the trademark registration, check the records of the state in which the territory will be located for the name, and review the FDD, especially the litigation and bankruptcy disclosures to see if there are any red flags.  We will thoroughly review the franchise agreement, to determine what the franchisee’s obligations are to the franchisor, what the franchisor’s obligations are to the franchisees, items that are typical or atypical, points that need clarification, or questions a prospective franchisee may want to ask.  We then schedule a two-to-three-hour review call to go over the documents and answer our clients’ questions.

• How much is it to have a lawyer review the franchise disclosure document and franchise agreement?

We charge a reasonable flat fee for a review so you do not have to worry about hourly rates inflating the final cost should something unexpected arise.  

• Do you need a lawyer when buying a franchise?

Would you buy a home without an inspection? Having knowledgeable legal representation in your corner can help ensure that your interests are protected and avoid potentially costly legal disputes further down the road.  Franchise law encompasses rules and regulations at both the state and federal levels.  It is essential to have someone on your side who understands this complex network and the impact these laws may have on your business venture.

• Are franchise agreements negotiable?

Typically, established systems do not negotiate their franchise agreements. However, newer systems that are just getting started selling franchises are more anxious to get the first few franchisees in their system and typically they do negotiate their agreements. We are familiar with many different brands and have a pretty good idea which ones will negotiate their agreement and which will not.

• Why Should I Use A Franchise Attorney And Not My Wife, Nephew, Neighbor Or Friend Who Is A General Attorney?

Would you want a family doctor to perform brain surgery on you? A general business attorney or any other type of attorney will not know what terms are typical, the types of terms that might be revised, and the best way to advise you. With our combined decades of experience, we are well-suited to provide the legal advice you need.

• If the agreements are not negotiable, why do I need an attorney?

The investment you are making is a huge commitment of both money and time. An attorney review by an experienced franchise attorney is critical to having a clear understanding of what you will be entering into. Luther Lanard has represented many attorneys who are buying franchises for a family member (or themselves) and knew it was important to have the legal review. This review should be considered the last step you take before investing any money or signing any contract.

•  Why do I need an attorney to form my business entity?

Filing the paperwork with the state is just one step in properly setting up your business entity so it shelters you from personal liability to third parties. If the entity is set up with the state, but not maintained properly, or is not set up completely with an operating agreement for a limited liability company or with by-laws and initial minutes for a corporation, a court may look beyond the entity and still hold you personally liable. We have the knowledge and experience to ensure that your entity is formed properly.

• What kind of help can you provide to me if I am buying an existing franchise location?

Buying an existing franchise location entails two parts – the first is evaluating the franchise opportunity, that is the relationship between you as a prospective franchisee and the prospective franchisor.  This includes reviewing the franchise agreement and advising on validating the franchise opportunity.  The second part is evaluating and helping to validate the acquisition of the business.  This is a buyer-seller relationship.  This entails drafting or reviewing and negotiating the purchase agreement and all accompanying documents, including evaluating the lease if it is a brick and mortar business.