Imagine launching a business with a recognizable brand, proven systems, and built-in customer trust from day one — that’s the appeal of becoming a franchisee. As a franchisee, you buy the right to operate under an established company’s name and follow its operating model, which can reduce some startup risk compared with building a business from scratch. With all these benefits, the franchisor can make a compelling case to join the franchise. A savvy entrepreneur will push back, will dig into the potential risks and ask the following question: what rights do I have if I go through with this agreement?
Before even agreeing to the deal, a potential franchisee generally has the right to receive a disclosure document. This right provides the interested party with the information they need to make an informed decision about joining the franchise. Legal remedies are available if a franchisor fails to disclose certain material facts. Franchisees should review disclosures for various red flags including any litigation history, termination triggers and supply restrictions.
Entering a franchise agreement creates binding legal obligations for franchisees. Rights moving forward are further outlined through franchise disclosure laws, contract law and the express terms of the franchise agreement. Potential franchisees are wise to review the proposal to get a better idea of rights regarding territory, brand, system access as well as renewal.
Rights tied to territory, brand, and system access
A protected territory may limit competition from the franchisor or other franchisees. A nonexclusive territory may permit encroachment through company owned units, online sales, alternative channels. It is important to review the language of the agreement, so you know what is offered in the deal.
It is also important to review terms regarding brand and system access. This often includes training, manuals, software, approved suppliers and marketing standards. If the agreement describes these items clearly, failure to deliver can become a breach claim.
Renewal, transfer, termination rights
These rights tend to be the most litigated and often include issues regarding:
- Notice of default
- Opportunity to cure within stated timeframes
- Defined renewal conditions, if renewal exists
- Ability to transfer, subject to reasonable approval criteria
It is important to review the terms that govern potential exit strategies so that franchisees know their options if the agreement is no longer in their best interest.
Rights are evolving
In a recent move to further protect franchisee rights, the National Owners Association (NOA), a group of franchisees, put together a “Franchisee Bill of Rights.” The proposal includes fifteen rights such as the need to allow for franchisees to have increased control over day-to-day operations as well as a fair and reasonable opportunity to renew their franchise agreements. Although specifically designed to reflect the relationship between the franchisees and franchisor it is similar to standards outlined by other franchisee advocacy groups including the American Association of Franchisees and Dealers and the Coalition of Franchisee Associations.
NOA states it expects the franchisor to follow these standards in their business relationship. The move is a sign that the franchise industry is shifting, and franchisees are expecting more fairness in its dealing with franchisors. Franchisee rights like those outlined above exist, yet they are not automatic. They come from disclosure statutes and negotiated contract language. Although a Franchisee Bill of Rights like the one noted above is not yet fully adopted within the industry, the push by NOA may be another step towards its acceptance. In the meantime, potential franchisees are wise to carefully review disclosure documents and agreements to mitigate the risk of any surprises before committing to the deal. These matters are complex and those who are considering entering a deal or moving forward with a dispute over their rights are wise to have legal counsel review the issue. We offer free consultations and can provide guidance tailored to the details of your case.
