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Branching Out: Decision to Franchise a Complex One

The New York Times recently profiled the owner of a tree-trimming business who was mulling the best way to expand: Either by opening up a second office in a nearby town or by establishing and selling franchises.
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When it comes to the question of how to grow a business, you must of course consider the best strategic approach in terms of market, opportunity and finances. However, it’s also critically important to weigh all potential legal implications as well. An experienced small business attorney can help.

Franchise law in New York can be especially complex, overseen and enforced by the State Attorney General’s Office. This is not an agency with which you want to go toe-to-toe in a legal battle. Thankfully, most issues that arise can be identified and addressed prior to making the deal, assuming you’ve had an attorney conduct a thorough review.

Once you have decided that franchising is the way you want to go, your focus needs to be on how you are going attract solid, committed investors and ways in which you can increase profit without exponentially expanding your potential liability.

The first part of this process will involve the disclosure document, which is known as the FDD. The purpose of this document is to give potential franchisees a better idea of your business model, your franchise system and other terms of the agreement.

By law, you can’t sell a franchise until you have presented the franchisor with the disclosure document. Some of the specifics this is going to include would be information regarding:

  • Key staff positions;
  • Management’s experience in franchising;
  • The litigation and bankruptcy history of the franchisor;
  • Any initial and/or ongoing fees associated with opening and running the franchise;
  • Required investments and purchases;
  • Territory rights;
  • Responsibilities and rights of the franchisee;
  • Other franchisees in the system, along with contact information should the franchisee want to conduct more thorough research.

Once this document has been presented, it’s standard that franchisors would provide at least a two-week period for prospective franchisees to consider the agreement.

Even if the franchisee agrees to the terms, the deal still isn’t done. From there, your attorney will need to help you draft the franchise agreement. This is a document that includes even more specifics, including:

  • Rights and obligations of all parties;
  • Territory guidelines;
  • The use of products and trademarks within the franchise system;
  • Termination and transfer rights;
  • Training, advertising and assistance rights;
  • Duration of the agreement.

Just as it’s important for franchise owners to consult first with an attorney, prospective investors and franchisees too should avail themselves of able legal representation prior to signing any franchise agreement.

Even those who have been through this process before and are familiar with it need to have an advocate who can analyze the fine print and help you make the most informed decision.

The Law Offices of Ira S. Newman provides business litigation representation in New York City, Long Island, Great Neck and surrounding areas. Call 516-487-7375 or send us an e-mail.

Additional Resources:
Why the Owner of Monster Tree Decided to Sell Franchises, Sept. 18, 2013, By John Grossman, The New York Times
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