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Buying or Selling A Franchise

In our global competitive business environment, consolidation and centralization creates a cutting edge to increase bottom line. A franchise creates a mechanism through which stable and successful businesses can increase sales, revenue, and market share. Generally, a franchise is a business arrangement creating a continuing commercial relationship. Though franchise rules vary from state to state, most definitions include three elements of a franchise:

  • Federal Franchise Rule: (1) the distribution of goods or services associated with the franchisor’s trademark or trade name; (2) significant control over, or significant assistance to, the franchisee; and (3) a required payment of at least $500 within months of starting business operations. 16 C.F.R. §§436.2(a)(1)(i).
  • Maryland Franchise Registration and Disclosure Law: Franchise means an . . . agreement in which: (1) a purchaser is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by the franchisor; (2) the operation of the business under the marketing plan or system is associated substantially with the trademark, service mark, trade name, logotype, advertising, or other commercial symbol that designates the franchisor or its affiliate; and (3) the purchaser must pay, directly or indirectly, a franchise fee. Md. Bus. Reg. §14-201(e)(1).
The Federal Trade Commission (“FTC”), Virginia, Maryland, New York, and several other states promulgated guidelines for registration and disclosures laws. (FTC Franchise Rule, 16 C.F.R. Part 436 (2007); MD Franchise Registration & Disclosure Law, MD Code – Business Regulation Sect. 14-201 et seq). Depending on where the franchise is being sold determines whether all or some of the elements will have to be met. Thus, whether the benefits and protections of the disclosure and relationship laws apply depends on whether the relationship amounts to franchise for which a competent attorney can assist and provide guidelines and drafting documents.
A Franchisor (one selling its Franchise) and Franchisee (one obtaining the rights to use Franchisor’s entity’s name, trademark, distributing goods, advertising, logotype, and services) have to enter into a Franchise Agreement which require relying on a mix of complicated rules and regulations. Several states require a Franchise Disclosure Document (“FDD”), known by several different terms in different states, to go under a review process where franchise examiners may request revisions to the FDD and/or state addenda to meet the state’s disclosure requirements. Some states even require that the Franchisee's monetary consideration get escrowed by Franchisor depending on Fanchisor’s financial condition.
If you are in a business to sell or in a process to acquire a Franchise, you will need to determine pursuant to Franchise Rule,16 C.F.R. §§436.2(a)(1)(i) and state laws whether you are entering into a franchise agreement. If that is the case you will need an attorney to effectively negotiate and draft a franchise agreement to effectuate the intent of both parties. There are several complications that arise in franchise laws and your ability to obtain a franchise agreement, such as:
  • Whether protections of franchise agreement and obligations apply.
  • What is negotiable and what is not negotiable.
  • Drafting a Franchise Agreement.
  • Disclosures and Regulations.
  • Trademarks, Logos, Copyrights, and Secrets.
  • Minimum Required Payments.
  • Control and Assistance by Franchisor.
  • Dispute Resolution and Arbitration
  • Termination by Franchisee or Franchisor.
  • Renewals and Subsequent Agreements.
  • Non-competition covenants.
  • Territory
  • Recovery of Attorney Fees.