Why You Need a Franchise Lawyer
Do you know why someone should hire a lawyer before buying a franchise? Read our article where we will guide you on this SO important topic.
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This article highlights insights from a Vetted Biz interview with franchise attorney Courtney Hutchinson, based in Naples, Florida. With years of experience in franchise law and a background in the franchise industry, Hutchinson provides essential advice for prospective franchisees on understanding the legal process, forming business entities, and navigating franchise agreements. Here are key takeaways from their discussion.
Courtney Hutchinson’s Background in Franchise Law
Courtney Hutchinson grew up in a family that owned multiple retail franchises, including 7/11 stores, which gave her a firsthand understanding of the franchisee experience. She later pursued a career in franchise law, combining her practical experience with legal expertise to help clients navigate the complexities of buying, operating, and selling franchises.
The Legal Foundation of Starting a Franchise
For those interested in buying a franchise, Hutchinson emphasizes the importance of establishing a solid legal foundation from the beginning. She advises new franchisees to form a business entity, such as an LLC or corporation, which will serve as the executing party of the franchise agreement. Additionally, obtaining an Employer Identification Number (EIN) from the IRS is critical, especially since processing times for EINs can be delayed, particularly for foreign nationals.
Setting Up a Business Entity and EIN
Establishing an LLC or corporation as the business entity for the franchise provides legal protection and organizes the franchise’s finances. Obtaining an EIN is crucial for opening a business bank account and managing finances through the established entity.
Importance of Timely Documentation
Completing these steps before signing a franchise agreement ensures that initial franchise fees and other expenses flow directly through the business entity, streamlining the legal and financial process.
The Value of a Franchise Attorney
Hutchinson strongly recommends having a franchise attorney review franchise agreements and disclosure documents. This ensures that franchisees fully understand the terms and potential implications of their contractual commitments. She notes that skipping this step can lead to costly mistakes, especially when dealing with complicated legal and regulatory requirements unique to each state.
Avoiding Common Legal Pitfalls
Many franchisees attempt to set up businesses themselves, but Hutchinson explains that overlooking details can lead to significant legal and financial consequences if disputes arise.
Registered Agent Services
In states like Florida, business owners must have a registered agent within the state to receive legal notices. Franchise attorneys often act in this capacity, further supporting their clients in meeting state requirements.
Conducting a Thorough Review of the Franchise Disclosure Document (FDD)
Hutchinson highlights the importance of reviewing the Franchise Disclosure Document (FDD), a comprehensive document detailing the franchise system’s fees, obligations, and other key information. She advises prospective franchisees to pay particular attention to fees, territory definitions, and the franchisor’s rights, as these aspects significantly impact the franchisee’s operations.
Identifying Hidden Fees and Costs
Franchisees should look beyond initial franchise fees, as FDDs may include various ongoing fees, such as royalties, marketing contributions, and vendor fees, that can add up over time. Hutchinson warns that some franchise systems may have undisclosed revenue streams, like vendor vetting fees, that franchisees may be responsible for.
Understanding Royalty and Marketing Fees
Royalty fees are typically based on a percentage of gross sales, but some franchisors require minimum royalty payments, which must be paid even if the franchisee isn’t profitable. Franchisees should evaluate these ongoing fees to determine the financial feasibility of the franchise.
Additional Legal Considerations for Franchisees
Franchisees should assess the profitability of current franchisees within the system to gauge the investment’s viability. Hutchinson stresses the importance of balancing economic analysis with legal protections, including negotiating key terms in the franchise agreement, such as approved vendor requirements and territory rights.
The Impact of Vendor Restrictions
Franchise agreements often limit franchisees to using approved vendors, which may pose challenges during supply shortages or introduce unexpected expenses. Hutchinson recommends considering these clauses during negotiations to mitigate potential issues.
Territory and Competition Clauses
Territory protection and competition clauses also need careful review. Some franchise agreements permit franchisors to operate nearby locations, which could impact a franchisee’s business.
Key Takeaways for Prospective Franchisees
- Establish a Legal Entity: Forming an LLC or corporation provides a solid legal structure and facilitates the franchise agreement’s execution.
- Obtain an EIN Early: An EIN is essential for setting up a business bank account and managing franchise finances.
- Review the FDD Thoroughly: Carefully examine the FDD for hidden fees, royalty structures, and other contractual obligations.
- Seek Legal Support: Hiring a franchise attorney can help avoid costly legal issues and ensure franchise terms align with the franchisee’s business goals.
- Negotiate Contract Terms: Address clauses like approved vendors and territory rights during negotiations to protect business interests.
For more information, watch the full interview with Courtney Hutchinson on our YouTube channel or explore additional resources on Vetted Biz’s portal for insights into franchise ownership and legal guidance.
