How to Avoid the Most Common Franchise Legal Issues

When you’re building a franchise from the ground up, it’s easy to get caught up in the excitement of strengthening a brand and expanding a business. But be careful: When it comes to the legality of running a franchise, there are a lot of details you might not be aware of off the bat. Whether you’re running the top rated cleaning franchise in Australia or starting a franchise from a small business, there are a lot of legal complications you could get stuck with if you’re not careful. Setting up franchise legal resources will help protect your work and safeguard your business no matter what happens. If you’re creating a franchise, it’s important to make sure your work stays privileged, safe, and legally protected no matter what. In addition to keeping a lawyer on staff, here are some things you should do to protect your business from common legal issues.

Make Sure Your Franchisor/Franchisee Contract is Clear

When starting a franchise, always remember that the relationship between franchisor and franchisee is built on trust, communication, and an airtight contract. Don’t make the mistake of operating on any terms other than a mutually agreed-upon signed contract that clearly states the terms of your agreement. Making sure you have everything in writing will go a long way toward protecting your interests in the long run. Before you begin operating out of a second location, you’ll need to pay a number of fees. First, you’ll be responsible for the franchise fee, which is generally between 5 and 6 percent of the first location’s revenue. You’ll also be responsible for royalty fees, which can be paid in installments over time or in a large upfront sum. The details will be up to the two of you, but having a lawyer look over your terms will help protect you from paying too much money through an unfair deal. You’ll also be able to have your lawyer look into what you’re responsible to pay for in terms of materials so that you don’t end up overpaying on the basics. When you open up your second store you’ll be responsible for everything from materials to rent to uniforms, so you want to make you’re paying exactly what it’s all worth and not a penny more.

Figure Out Royalties in Advance

One of the biggest points of contention between franchisors and franchisees is the matter of royalty payments. Whether you decide on paying an upfront fee or creating an installment plan that factor in a percentage of your per-year or per-month profits, finding a way to make sure everything comes out even is important. If a franchisee is seeing a profit on the starting business but the franchisor is only scraping by from month to month, a more equal arrangement has to be figured out. As a franchisor, you’re in the more vulnerable position, especially since opening up a number of new stores requires more capital and more risk. Don’t leave things unclear: Have your lawyer communicate with your franchisee to figure out a fair royalty payment plan.

Look Into Your State’s Registration Fees

Each state’s franchising laws are different, and unless you want to get slammed with a huge fee and even possibly closed down, you’ll want to pay attention to your state’s requirements. While some states require you to pay a franchise fee, others will also require you to complete a Franchise Disclosure Document. This is a document that exists to protect you from being taken advantage of, so even if your state doesn’t require it, you should ask your lawyer to draw one up. In addition to outlining franchisee obligations and bankruptcy protocol should things not work out, your FDD will protect you from having to pay unnecessary fees to your franchisor. This agreement has to be signed at least two weeks before opening in states that require it, so plan to go over the document far in advance with your franchisee.

Run Everything Past Your Lawyer First

It goes without saying, but when it comes to legal matters, disagreements between you and your franchisee, or any complications you come up during your first year of business, your lawyer is your best friend. Having a lawyer on staff won’t just protect you from running into legal trouble. Having a lawyer overseeing your contracts and negotiating for your rights will help you from being railroaded into overpaying your franchisee or losing out on potential profit. Making sure you stay on the right side of the law will help you grow your business sustainably.

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