Here’s a question for you. What do KFC, 7-Eleven and McDonald’s have in common? Several answers may come to mind, but only one is relevant for the purposes of this article. The answer of relevance here is that all three top the list of Franchise Direct’s 100 Global Franchises Ranking report for 2022.
When you think about it that probably doesn’t come as a surprise. After all, these are some of the most recognizable names not only in the United States, but globally as well. And they have attained that recognition with good reason. According to Franchise Direct, KFC opened more than 420 “net new” eateries in the second quarter of 2021 alone. Franchise Direct also noted that 7-Eleven has more than 77,000 locations, or more than double than McDonald’s. As for the popular American fast food franchise, it is so well established here and abroad that it nabbed third place in the rankings with less growth than the top two franchises last year.
Marriott International, Burger King, Pizza Hut, Taco Bell, Domino’s, Ace Hardware and Century 21 Real Estate round out the top 10 in Franchise Direct’s 100 Global Franchises Ranking report for this year.
Clearly there are plenty of opportunities for anyone who wants a “piece of the action.” But there’s also a lot to consider. For one thing, you’ll have to sign a franchise agreement. In this article, the business lawyers from the Los Angeles Law Office of Parag L. Amin, P.C. (“LawPLA”) discuss what that is and why it is so important.
To understand the nuances of a franchise agreement, you must understand what a franchise, or what franchising actually is. To facilitate a better understanding, we’ll provide a general definition and the legal definition in California.
In it’s simplest terms, a franchise, or franchising is a business model involving two parties. One is the franchisor. This is the existing business entity that has established the brand’s trademark or trade name and business practices. Then there’s the franchisee. He or she gets the right to conduct business under the franchisor’s name, using its business practices in exchange forroyalty payment and preliminary fee (in most cases). In a so-called “business format” franchising scheme, the franchisor also provides additional help. This typically includes but is not limited to training, marketing strategy and business counseling.
Accordingly, California law defines a franchise as a contract or agreement, either expressed or implied, made verbally or in writing between at least two parties that:
- Permits the franchisee to conduct the business of offering, selling or distributing goods or services in accordance with a marketing plan or system approved in considerable part by a franchisor; and
- The management of the franchisee’s business based on practices approved by the franchisor is largely associated with its “trademark, service mark, trade name, logotype, advertising, or other commercial symbol” specific to the franchisor or its affiliate; and
- The franchisee must pay a franchise fee, either directly or indirectly.
The franchise agreement
The franchise agreement is a legally binding contract or agreement between you (the franchisee) and the franchisor. As such, this document – which all parties must sign – is also the foundation for the franchise. It generally stipulates:
- Where (locality, area or region) the franchisee can do business and if the franchisee has sole rights to do business there.
- The rules the franchisee must follow in the course of routine business.
- The type, extent and location of any training provided by the franchisor.
- How long the franchise agreement remains in effect.
- Preliminary fee amount and any other relevant details.
- Royalty payment amounts, method of payment (IE: percentage of sales), frequency of payments (bi-weekly, monthly, etc.) and payment deadlines.
- Ways in which the franchisee can use the franchisor’s trademark, patent, logo and signage.
- The extent to which the franchisee is responsible for marketing and advertising costs.
- Conditions for renewal, termination or cancellation of the agreement.
- Applicable conditions if the franchisee wants to sell the franchise.
With all of that being stated, there are a couple of important points to keep in mind. The first is that there is no such thing as a “boilerplate” franchise agreement. This is because terms, conditions, and business practices for franchises change based on the industry in which they operate. For example, a franchise agreement in the fast food segment is different from one in the hotel or real estate segments.
Secondly, make sure that the franchisor gives you a franchise disclosure document(FDD), as mandated the by Federal Trade Commission (FTC) before you sign the franchise agreement. This is a “presale” document that lets you know what you may be getting yourself into in terms of potential risks, rewards and so on.
California law governing franchises
The California Franchise Relations Act, which can be found in the state’s Business and Professions Code, defines and governs franchising activities here. Specifically, it applies “to any franchise where either the franchisee is domiciled in this state or the franchised business is or has been operated in this state.”
Among other things, it details what constitutes unlawful termination of a franchise agreement. It also defines “good cause” for termination of the agreement prior to the renewal/termination date. Additionally, it specifies what the franchisor must do when it decides not to renew the franchise. Lastly, it details acceptable methods and venues for resolution of disputes.
While there are no guarantees everything will go smoothly, there are certain precautions you can take to avoid disputes with your franchisor. One of the most important is consulting a knowledgeable Los Angeles franchise lawyer.
At LawPLA, our attorneys have the skill and experience needed to help you understand the nuances of any franchise agreement. As a client, we are also committed to acting in your best interest.So why leave anything to chance? Contact us through our website, or call our Los Angeles office to schedule a free consultation, now.