Publication : Brochures
Entering a Franchise Agreement
This brochure has been prepared by the Maryland State Bar Association's Public
Awareness Committee. It is intended to inform the public and not serve as legal
Entering a franchise arrangement is one
option to start your own business with minimum risk. Although some franchises
offer tried and true plans for business opportunities, prospective franchisees
must be wary of franchisers who appear to offer sure-fire methods for success
while struggling themselves to stay alive in the market. The mere fact that
a business is franchised is not a guarantee of its success. If you are considering
entering a franchise agreement, be prepared to do the same research and careful
planning that go with any start-up venture.
THINGS TO KNOW BEFORE CHOOSING A FRANCHISE
Before you decide that franchising is right
for you, consider several factors. Investigating and closely comparing three
or four franchisers will give you an idea of "norms" in the industry.
Information about a franchiser and its expectations can be obtained from
the franchiser and various governmental and trade organizations. As a prospective
franchisee, you should obtain as much information as possible. The list below
is far from being all-inclusive; however, it provides a guide for essential
issues to evaluate:
Just as in any business venture, franchised
businesses are subject to market fluctuations and economic trends. You
should obtain a thorough analysis of an area's demographics to decide
if the potential location is prime for such an operation. Just because
a restaurant is successful in southern California does not mean it will
be successful in Maryland.
Evaluate your knowledge of the franchise
business. How much, if any, experience do you have in the area? If you
do not have much experience, decide whether the franchiser's training
program will compensate for your lack of experience.
Be willing to devote a great deal of
time, effort and money to the operation. Franchisers often require that
the franchisee be personally involved in the day-to-day operations of
the business and personally guarantee the financial obligations of the
business. Do not be deceived. You will not simply negotiate the deal
and wait for the profits to roll in.
Find out how many franchises the franchiser
owns. Significant franchiser ownership may show the franchiser's confidence
in its product and create common interests between the franchiser and
The cash needs for the franchise operations
are similar to any other start-up business. As a franchisee, you must
pay a franchise fee in addition to financing the premises, equipment,
advertising and operating capital. Franchisers will usually provide an
estimate of capital required to start, but it is best to obtain an independent
As a franchisee, you will be required
to follow the franchiser's operational requirements. Often, such requirements
are all-encompassing. Therefore, if you are an independent person who
prefers to do things your own way, you should evaluate whether you can
operate within the structures of the franchise.
ENTERING A FRANCHISE AGREEMENT
After narrowing down the field and deciding
upon one or two franchises, carefully scrutinize the franchise agreements.
Depending upon the franchiser, you should be able to successfully negotiate
some terms of the agreement. Franchisers generally will not agree to major
variations; however, the widely-held notion tha franchise agreements are
nonnegotiable is not true. Below are some issues that may arise when reviewing
franchise agreements. Although these issues will not arise until negotiations
begin, keep them in mind when comparing franchises in the first stages of
investigating business opportunities.
You will be required to pay a franchise
fee set by the franchiser. Usually, they offer two main selling points:
a trademark and a marketing or business plan. Potential franchisees should
assess the strength and image of the trademark, and its potential confusion
with other trademarks. Consulting an Intellectual Property attorney if
possible, may be helpful in making such an assessment. Moreover, the
franchise, agreement should contain specific representations regarding
ownership and genuiness of the trademark. The franchise agreement should
also obligate the franchiser to indemnify you, the franchisee, from any
claims by third parties challenging the validity or use of the trademark.
Bearing in mind the potential location of the operation, you should arrange
for an independent evaluation of the business strategy.
In addition to the up-front franchise
fee and royalties that you may be required to pay, additional hidden
costs may be associated with the franchise operation. These hidden costs
can come in many forms such as accounting fees, lease location expenses
and supervision fees. Furthermore, the franchiser may be receiving additional
sources of revenue from the franchise arrangement, such as rebates from
You should carefully consider the geographic
scope of your proposed franchises territory while keeping in mind its
location and your ultimate business plan.
The franchise term is an issue that
is sometimes disputed. Franchisers typically grant terms of eight to
15 years. You, as the franchisee, should ask for a term that allows you
to establish the business and recover your capital costs. Be careful;
franchisers can terminate some franchise agreements at will upon written
notice to the franchisee. Although the franchiser may insist on flexibility,
it is not in your best interest, especially if you must pay a substantial
You and the franchiser must also agree
upon: the ability to renew the agreement; what will happen to the franchise
if the franchisee dies; whether the franchiser can sell competitive products;
and the amount of ongoing services that the franchiser will provide during
the term of the agreement. While these issues are too complicated
to consider here, be aware that important business and legal issues arise
when entering a franchise arrangement. You should consult a lawyer and
an accountant before entering such an arrangement.
SOURCES OF INFORMATION ABOUT THE FRANCHISE
Obtain information from several sources.
First, ask the franchiser for a list of all existing and past franchisees
with names, addresses and telephone numbers, and call as many as possible.
Ask questions about the business and about the franchisers representations.
Any reluctance by a franchiser to provide this information should cause concern.
Next, each franchiser doing business in
Maryland must register with the State. Registration requires the franchiser
to file a disclosure document, called a prospectus, which contains important
information describing the franchise. By law, the prospectus must provide
pertinent details about the franchise offer, including the franchise fee
or information about the way the fee will be set. Moreover, a franchiser
must provide a franchisee with a copy of the prospectus and copy of any agreement
involved in the sale of the franchise. Such copies must be provided either
the first time the franchiser and franchisee meet, or within 10 days before
any contract is signed or payment is made that relates to the franchise.
If the franchiser will not provide this
information, you may contact the Office of the Attorney General to report
this conduct and/or to obtain the prospectus, if one has been filed. You
should also contact the Attorney General's Office and/or a private attorney
if the franchiser provides you with false or misleading information. Write
or call: Securities Commissioner, Office of the Attorney General, 200 Saint
Paul Place, Baltimore, Maryland 21202-2020, (410) 576-6360. You may visit
the Attorney General's website at www.oag.state.md.us;
franchise information may be found under "Securities."
And finally, the International Franchise
Association (IFA), a trade organization located in Washington, DC provides
information about franchise opportunities, individual franchisers and franchising
arrangements. The IFA makes this information available to the public through
a series of books, tapes and pamphlets. For a list of materials, write or
call International Franchise Association, 1350 New York Avenue, Suite 900,
Washington, DC 20005, (202) 628-8000.
Entering a Franchise
Agreement © 1994, MSBA, Inc. Revised 2002
All rights reserved. No part of this work may be reproduced in any
form without written permission from the Maryland State Bar Association.