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Legal Advantages and Disadvantages of Buying a Franchise

A franchise allows individuals and groups to share their trademark, service mark, trade name, and advertising symbols in order to establish a stronger commercial presence than the businesses could produce individually. However, agreeing to buy a franchise frequently also involves agreeing to participate in marketing plans and supply agreements that are difficult or impossible to negotiate as an individual franchisee. The following article reviews some of the legal franchise advantages and disadvantages from the perspective of the franchisee.

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Marketing Plans

A joint marketing plan is one of the major advantages of a franchise agreement. However, a franchisee's participation in a marketing plan may involve requirements that the franchisee purchase advertising in local markets, purchase additional supplies, and offer goods or services at a price reduction with little or no input. If your franchise is struggling to profit, these additional expenses may strain an already struggling business's finances.

On the other hand, participation in franchise marketing plans may allow you to access preferential pricing on supplies, or the franchisor may provide access to funding for advertising efforts.

Whether marketing plans are an asset or liability will depend upon your franchise agreement, which will determine how voluntary the franchisee's participation is. Where participation is voluntary you will have better control over determining which promotions are most effective in your market.

Supply Agreements

One of the fundamental aspects of a franchise is that the franchisee is engaged in the sale of goods or services supplied by the franchisor. This is both the greatest advantage and the greatest liability. One of the most basic rights a consumer has in the marketplace is the ability to seek a different source for their products. Without the ability to seek another vendor, the purchaser is largely at their mercy.

An efficient supply chain should ideally provide lower costs, higher quality, and consistency between franchisees in ways that directly benefit them all. Unfortunately, a mandatory supply chain might just as well saddle you with the opposite of each of these intended benefits.

A comprehensive review of your obligations as a franchisee, as well as a review of the experiences of current franchisees, might provide greater insight regarding your risk and reasonable expectations as a potential franchisee.

Statutory Protections

Some jurisdictions have provided special statutory protections for those in franchise relationships. These laws typically provide protection for issues that relate to franchise advantages and disadvantages, such as:

  • Requiring a material breach of a franchise agreement to justify a termination;
  • Requiring notice of default and an opportunity to cure;
  • Requiring good cause for a franchisor to deny franchisee transfer;
  • Protecting franchisee rights to form franchise associations;
  • Prohibiting discrimination among similarly situated franchisees; and
  • Limiting franchisor's ability to require litigation in an out-of-state forum.

A solid understanding of your state's franchise laws will help you make a smart decision.

Learn More About Franchise Advantages and Disadvantages

Attorneys are normally associated with disputes, but their help can also be useful in avoiding litigation. Local lawyers can help you make important business decisions and understand the laws that will affect your rights in a business transaction. Contact a local franchise attorney to discuss how they can help you make the most of your franchise opportunity.

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