As the economy continues its march toward recovery, many small business owners are becoming emboldened by the prospect of branching out.
Growth of a small business has to be done in a calculated manner, and our Boston business lawyers know that there are a number of different ways through which it can be successfully achieved.
One of the options that business owners will want to weigh is whether they should go the route of sole ownership or whether they should instead turn to franchising. Each comes with its own unique set of benefits and challenges. For those considering both options, a consultation with an experienced legal team may help you determine which is best for you. There could be legal implications, depending on your size, business model and projected growth, of which you may not yet be aware.
Franchising means you would be trusting other people with your brand. It’s important to have a good system and model that is replicable in other markets and locations. Also, establishing a franchise can be costly, sometimes $100,000 or more, depending on the type of business.
The trade-off, though, is that your involvement from there can be relatively hands-off, while you in turn receive a percentage of the revenue. The key is determining how many years and franchises it would take for a company to earn back that initial investment.
In some cases, it may be more advisable to open a second location yourself, to test the viability of a company in a different market.
For those who do decide to move forward with the franchise option, a key element will be the drafting of the disclosure agreement, known as the FDD.These documents, which must be carefully-drawn up, need to provide prospective franchisees with information regarding the franchisor, the internal systems and any agreement they will need to sign. It’s going to include information about your staff, the management’s experience, any litigation or bankruptcy history, any fees associated with opening or running the franchise and any required purchases or investments. The idea is that all parties will be making informed decisions.
Generally, franchisees have two weeks to consider whether they want to move forward with an agreement after reviewing the FDD. After that time, the franchisor would present the franchisee with a franchise agreement, which would detail more specific terms of the relationship between the two, including use of products and trademarks, territory, obligations and rights, standard procedures, duration, training, advertising, payments and termination rights of either party.
They will also spell out the terms of liability. Generally, franchisors are not liable for claims of individuals injured on the franchise premises, as they do not control day-to-day operations on the franchised location. Still, this kind of language needs to be spelled out explicitly in the franchise agreement.
These documents should never be boiler plate, but rather should be drafted by a legal professional who has carefully considered the ins and outs of your firm.
Likewise, those considering becoming a franchisee should never sign either of these documents without first having them reviewed by their own legal representative.
The Brown Law Firm, LLC, has offices in Belmont and Boston. For a free and confidential consultation, call 617-489-0817 or contact us online.
A Fast-Growing Tree Service Considers Selling Franchises, Sept. 11, 2013, By John Grossmann, The New York Times
More Blog Entries:
Boston Business Acquisitions Require Legal Guidance, June 22, 2013, Boston Business Lawyer Blog