By Susan Buckner, J.D. | Legally reviewed by Melissa Bender, Esq. | Last reviewed April 10, 2024
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Selling your own product is satisfying but carries an element of risk. Some small-business owners like the confidence that a known product provides. For these owners, franchise opportunities are the chance to start a business with the support of an established company.
A franchise is a legal business relationship between the owner of an existing brand (the franchisor) and someone who licenses the brand for sale (the franchisee). McDonald's restaurants are examples of a franchise business. The McDonald's Corp. owns the brand, but a franchisee owns and operates each franchise.
State and federal laws regulate franchisors' operations. The Federal Trade Commission (FTC) requires all franchisors to provide prospective franchisees with a 23-element list of disclosures. The Franchise Rule applies to all legal issues surrounding franchise purchases.
FindLaw's Consumer Guide to Buying a Franchise has more information about franchise laws.
A business relationship must have three key elements to be a franchise. Entrepreneurs considering purchasing a franchise should ensure that all elements are part of the franchise agreement before signing.
There are different types of franchise contracts, depending on the parties' business goals. In one type, product franchising, the franchisee has the right to sell the franchise owner's trademark or product. Auto dealerships and shoe stores are examples of product franchising.
Business-model franchising creates a long-term relationship between the parties. In this franchise model, the franchisee operates a business using the franchisor's corporate system. Fast-food franchises are the best-known example of business-model franchising.
The FTC enforces the Franchise Rule. Franchisees have the right to file lawsuits against franchisors for unfair trade practices. The franchise agreement is a binding legal document and must contain specific information. Franchisors must provide a franchise disclosure document (FDD) as well. This must contain:
Failure to provide the franchise disclosure document (FDD), providing an incomplete FDD, or misrepresenting information are all grounds for legal action.
The FDD may contain red flags about the franchisor or the nature of the new business. Potential franchisees should remember that this is a business contract, and you are entitled to legal representation to protect your rights.
FindLaw's Franchise Agreement Questionnaire is a convenient way to review any concerns you may have with the agreement or FDD and discuss them with a franchise lawyer.
State and federal laws regulate the franchise industry. If you want to buy a franchise, you need an experienced franchise attorney to protect your interests. Contact a business attorney specializing in franchise law in your area.
Contact a qualified attorney to make sure your rights and interests get protected.
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