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From franchise agreements to compliance with federal and state regulations, franchisors must be mindful of several key legal requirements to ensure their business model remains successful and sustainable as they grow.&nbsp;1851 Franchise reached out to&nbsp;<a href="https://www.lippes.com/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=key-legal-requirements-for-franchisors-what-you-need-to-know-2725810" target="_blank" rel="nofollow">Lippes Mathias LLP</a> with some questions about the key legal requirements franchisors must understand. A team of experts, consisting of&nbsp;<a href="https://www.linkedin.com/in/masbell/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=key-legal-requirements-for-franchisors-what-you-need-to-know-2725810" target="_blank" rel="nofollow">Matthew Asbell</a> (partner),&nbsp;<a href="https://www.linkedin.com/in/christian-lovelace-0a0a50b/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=key-legal-requirements-for-franchisors-what-you-need-to-know-2725810" target="_blank" rel="nofollow">Christian Lovelace</a> (partner),&nbsp;<a href="https://www.linkedin.com/in/andrewjolek/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=key-legal-requirements-for-franchisors-what-you-need-to-know-2725810" target="_blank" rel="nofollow">Andrew Olek</a> (corporate attorney) and&nbsp;<a href="https://www.linkedin.com/in/chintand/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=key-legal-requirements-for-franchisors-what-you-need-to-know-2725810" target="_blank" rel="nofollow">Chintan Desai</a> (intellectual property counsel) collaborated to provide answers.<h3>Understanding the Franchise Agreement</h3>The franchise agreement is a legally binding document that outlines the terms and conditions governing the interaction between the franchisor and the franchisee. This comprehensive document covers essential aspects such as fees, royalties, territory rights and branding standards.&nbsp;“The primary purpose of both federal and state franchise laws is to protect the franchisees and their investment, which typically is structured with significant upfront costs to the franchisee,” explained the Lippes Mathias team.&nbsp;Both parties should thoroughly review and understand the terms laid out in the franchise agreement before entering into any agreements. As a franchisor, you should set clear expectations and detail both parties’ obligations so that the franchisee understands that significant deviations from your established system are not feasible.“A clear and transparent franchise agreement is critical to avoid ambiguity if an issue arises between franchisor and franchisee as to any of the terms contained in the franchise agreement,” explained the experts at Lippes Mathias. “Opening a franchise business is often a complex and stressful process. If the franchise agreement is clear as to requirements as to the operation of the franchised business and the fees that will be owed by the franchisee, a franchisee can note these requirements from the outset and build those requirements and payment schedules into their business plan/operations.”&nbsp;However, even with a clear and transparent franchisee agreement, the Lippes Mathias team advises that franchisees consult an attorney to ensure a clear understanding of all aspects of the agreement.<h3>Compliance with Federal and State Franchise Regulations</h3>Firstly, you need to register your brand according to the rules in the state(s) in which it will operate. You need to be aware of laws and regulations that affect franchises at both the federal and state levels. From labor laws to advertising regulations, you must hold franchisees accountable and you must also, of course, be compliant. Working with franchise-specific attorneys is highly recommended, as they can provide invaluable guidance on navigating the complex franchise regulations and ensure adherence to evolving legal standards. By remaining aware of regulatory changes and maintaining compliance, you can safeguard the integrity of your business operations and mitigate legal risks.<h3>Trademark and Branding Standards: Protecting Intellectual Property</h3>Undoubtedly, you’ll want to maintain brand consistency and protect intellectual property rights. To do this, you’ll need to follow the appropriate protocol for trademarking and patenting.&nbsp;“Franchisors need to consider geographic scope — where they already franchise and where they expect to franchise in the future (typically in the next 5 years or less) — as well as the full range of products and services that they offer so that they can obtain appropriate trademark and trade dress protections,” said the Lippes Mathias team. “They should also consider whether to register copyrights in any logos or other graphic elements that they allow franchisees to use, and whether to seek design patent/industrial design protections in relation to important product designs that they allow franchisees to use.”Franchisees are typically required to adhere to strict branding and operational standards set by the franchisor, including the use of trademarks and logos. It’s also a good idea to put quality control measures in place.&nbsp;“Franchisors also need to consider implementing a monitoring and enforcement program to ensure that franchisees have a means of reporting infringements that they encounter and that franchisees abide by the terms of the trademark and other IP licenses in the franchise agreement,” explained the experts at Lippes Mathias.If a franchisee does not comply with these standards despite legally having agreed to do so, this would mean a breach of contract or trademark infringement on the franchisee’s part.As a franchisor, you must take proactive measures to safeguard your brand and ensure that franchisees adhere to clear guidelines so as to not damage the reputation of the brand.<h3>Royalty and Fee Structures: Ensuring Financial Stability For Both Parties</h3>Franchisees are obligated to pay ongoing fees, including royalties based on gross revenue, advertising funds and training fees. Be transparent about fee structures and ensure that they are reasonable and sustainable for franchisees. Excessive or undisclosed fees are more likely to lead to disputes or legal issues. According to the Lippes Mathias team, this upfront fee helps establish a successful relationship between the franchisee and franchisor.&nbsp;“Charging too high of an upfront fee can result in eliminating a significant portion of potential franchisees before they even reach page 2 of the franchise agreement,” they said. “For the franchisee, it is important to understand they are getting an established system and brand from the franchisor, which is why nearly every franchisor requires an upfront fee. The goal of the franchisee is to then utilize that developed system and brand to create their own successful franchised location, which, while still incurring a monthly or quarterly royalty payment to franchisor, can still be profitable for the franchisee.”Ideally, you should establish fair and equitable fee structures to foster long-term profitability for both parties.<h3>Renewal and Termination: Understanding Contractual Obligations</h3>Franchise agreements typically have fixed terms, and renewal is dependent on specific conditions and payment of renewal fees. Termination clauses grant franchisors the authority to end the agreement for non-compliance, poor performance or other specified reasons. By clarifying renewal and termination procedures upfront, both parties will have clearer expectations, which mitigates the potential for disputes down the line.Franchising offers excellent opportunities for business expansion and success, but it also comes with significant legal responsibilities. As a franchisor, be sure to gain a full understanding of all legal responsibilities of both parties and take care to communicate them clearly to all franchisees to safeguard your brand in the long run.To learn more about the legal aspects of franchising, check out these resources:&nbsp;<ul><li><a href="https://1851franchise.com/the-key-legal-terms-you-need-to-know-in-franchising-2724717#stories">The Key Legal Terms You Need to Know in Franchising</a></li><li><a href="https://1851franchise.com/franchise-registration-states-what-you-need-to-know-2725152#stories">Franchise Registration States: What You Need to Know</a></li><li><a href="https://1851franchise.com/what-is-a-franchise-lawyer-and-why-would-i-need-one-2725334#stories">What Is a Franchise Lawyer and Why Would I Need One?</a></li><li><a href="https://1851franchise.com/what-are-the-legal-risks-of-owning-a-franchise-business-2723320#stories">What Are the Legal Risks of Owning a Franchise Business?</a></li></ul>

Franchise Legal Requirements: Essential Tips for Franchisors

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The following advice can help franchisors understand and mitigate the legal risks that come with franchising a business.

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