Business Mentor: Legal issues In franchising

Armando Bartolome

Posted at Sep 24 2022 08:34 AM

Opening a franchise business means you do not have to go through many of the growing pains that small business owners usually go through. However, this does not mean that it will always be smooth sailing. As a franchisor, you may still face some unique legal issues.

Having a franchise means the business owner (franchisee) does not need to start from scratch. Instead, the franchisee can begin with the brand with name recognition and considerable customer loyalty. In exchange for these, however, the franchisee has to pay the franchising fee and possibly the royalty fee, which will be collected weekly or monthly.

The amount you pay to use the business's name may be worth the risk, especially if you choose a brand that is widely recognized. However, keep in mind that starting a franchise may not be for everyone. Here are some legal challenges encountered in franchising.

1. Failure to provide an explicit, standard franchise agreement 

It is fundamental that the franchisee read the contract thoroughly and ask questions to the franchisor before finally signing the agreement. The franchisor must create a robust and reliable system and indicate the regulations regarding the operations of all franchisees, including activity restrictions. There must be strict adherence to these policies. The franchisor should clearly state the do's and don'ts to prevent jeopardizing the whole system, which may result in the collapse of the business.

Along with the agreement, the franchisor should provide an updated franchisee manual with straightforward operational methods that would set as a guide to adhere to the standards of the franchise business.

2. Lack of support from the franchisor 

The franchise agreement should always include providing support to the franchisee. All franchisees expect a certain level of support, particularly when starting their business. However, in some cases, the franchisor's eagerness to provide support slowly declines as soon as the franchisor has received the franchise fee. The franchisor can face some legal issues with this. Therefore, it is always wise to research which brand to choose and take time to talk to existing franchisees regarding their relationship with the franchisor.

3. An uncontrolled number of franchisees 

While business expansion is the main reason a business owner opens their business for the franchise, this does not mean they should just accept every franchise applicant that comes along. What happens when franchise locations are too close to one another? The sale is divided and is likely not to hit the monthly quota. It is not ideal for the business. Again, included in the franchise agreement, the franchisor should indicate how many franchisees can set up in a given area.

4. Customer complaints on unfair commercial practices or defects in goods

The franchisees do not have their suppliers to provide everything they need for their business. They place their orders through the franchisor's office, and the franchisor will be the one to talk to the suppliers and deliver the goods to each franchisee. When a franchisor fails to thoroughly check the quality of the goods provided and reaches the franchisee's customers, this may result in some legal disputes. To set high standards for the franchisees, a brand must have high standards when choosing suppliers. Certain conditions, such as warranty, adequate delivery schedule, and payment terms, should be followed. Thus, franchisors should check on their suppliers to see if they can provide the supplies needed according to the brand's standards.

Any customer who doesn't feel they are receiving their money's worth can file a complaint. And the franchisor should be able to resolve the issue at the soonest possible time.

5. Differences between franchising locally and internationally

Expect due diligence from every franchisor. And with the different territories come different laws follow. Therefore, knowing the laws that govern franchising must be necessary wherever the franchise business should exist.

6. Competition and rivalry

A franchisee should only carry the brand's products and nothing else. It would create a problem if the franchisee promoted goods from another franchisor while the franchisee was in business with the brand.

7. Intellectual property rights 

All franchise agreements carry some sort of invention or unique creation to distinguish them from the brand. Thus, this would entail having to apply for a trademark. Failure to make this move may cause some problems and, at the same time, confusion with existing customers.

There are always risks associated with any kind of business. 

For more information, you may contact Armando "Butz" Bartolome 
by email:
FB Page: Butz Bartolome


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