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From franchise agreements to compliance and trademarking, there is a lot of information to take into account before signing on the dotted line. To get you started, here are some common&nbsp;<a href="https://1851franchise.com/chapter-5-franchise-legal-considerations-2722562#stories">legal considerations</a> associated with owning a franchise.&nbsp;<h3>The Franchise Agreement&nbsp;</h3>If all parties agree with the franchise partnership, the franchisee will be offered what is called a franchise agreement. This document serves as a legally binding contract that outlines the rights and responsibilities of both the franchisor and the franchisee. It's crucial to review and understand the terms of the agreement before signing, as it will include important aspects of your business operations, such as fees, territory and branding.&nbsp;<a href="https://www.linkedin.com/in/tom-spadea-a696256?utm_source=1851franchise.com&amp%3Butm_medium=article&amp%3Butm_campaign=chapter-5-franchise-legal-considerations-2722562&utm_source=1851franchise.com&utm_medium=article&utm_campaign=what-are-the-legal-risks-of-owning-a-franchise-business-2723320" target="_blank" rel="nofollow">Tom Spadea</a>, a founding partner at&nbsp;<a href="https://1851franchise.com/spadealignanafranchiseattorneys?utm_source=1851franchise.com&amp;utm_medium=article&amp;utm_campaign=chapter-5-franchise-legal-considerations-2722562">Spadea Lignana Franchise Attorneys</a>, told 1851 Franchise that both franchisees and franchisors should not go into it expecting to change a lot.&nbsp;“You shouldn't be expecting to come in as a franchisee and change things,” he said. “A franchisee that gets a franchisor to change too much is probably buying into the wrong system. It is okay to include a few important and personal requests, not systemwide requests. And from the franchisor perspective, franchisees who ask for too much are probably not the right ones.”&nbsp;<h3>Compliance with Federal and State Franchise Regulations&nbsp;</h3>Franchise businesses are subject to various laws and regulations, including those related to labor, health and safety, and advertising. Changes in these laws could impact your business operations and potentially lead to legal challenges. It is crucial for franchises and franchisees to ensure they are complying with all regulations at the state and federal level. The best way to do that is by working with a franchise-specific attorney, says&nbsp;<a href="https://www.linkedin.com/in/elliskim?original_referer=&amp%3Butm_source=1851franchise.com&amp%3Butm_medium=article&amp%3Butm_campaign=chapter-5-franchise-legal-considerations-2722562&utm_source=1851franchise.com&utm_medium=article&utm_campaign=what-are-the-legal-risks-of-owning-a-franchise-business-2723320" target="_blank" rel="nofollow">Kim Ellis</a>, vice president of Franchise Development &amp; Legal at&nbsp;<a href="https://www.brustersfranchise.com/?utm_source=1851franchise.com&amp%3Butm_medium=article&amp%3Butm_campaign=chapter-5-franchise-legal-considerations-2722562&utm_source=1851franchise.com&utm_medium=article&utm_campaign=what-are-the-legal-risks-of-owning-a-franchise-business-2723320" target="_blank" rel="nofollow">Bruster's Real Ice Cream</a>.&nbsp;“Having a franchise-specific attorney is going to make your franchise organization stronger because the state and federal laws are always changing,” she said. “We have to make sure that our registration documents are up to compliance with those changes.”<h3>Trademark and Branding Issues</h3>Franchisees are typically required to adhere to&nbsp;<a href="https://1851franchise.com/chapter-7-protecting-your-intellectual-property-2722573#stories">certain branding and operational standards.</a> This involves using the franchisor's trademarks, logos, maintaining quality control, following design and decor standards, and complying with advertising and marketing guidelines. Failure to meet these standards could result in legal action for breach of contract or trademark infringement and may negatively affect the brand's consistency and reputation.“Intellectual property rights, specifically trademarks, patents, copyrights and trade secrets, are at the heart of a franchise agreement,” noted&nbsp;<a href="https://www.linkedin.com/in/mark-brutzkus-3131025/?utm_source=1851franchise.com&amp%3Butm_medium=article&amp%3Butm_campaign=chapter-7-protecting-your-intellectual-property-2722573&utm_source=1851franchise.com&utm_medium=article&utm_campaign=what-are-the-legal-risks-of-owning-a-franchise-business-2723320" target="_blank" rel="nofollow">Mark Brutzkus</a>, a partner at&nbsp;<a href="https://stubbsalderton.com/?utm_source=1851franchise.com&amp%3Butm_medium=article&amp%3Butm_campaign=chapter-7-protecting-your-intellectual-property-2722573&utm_source=1851franchise.com&utm_medium=article&utm_campaign=what-are-the-legal-risks-of-owning-a-franchise-business-2723320" target="_blank" rel="nofollow">Stubbs Alderton &amp; Markiles, LLP</a>. “In a franchise agreement, it is important that the franchisor is the owner of, or has the legal right to use, the franchise’s intellectual property, including trade names or trademarks. Also, it is critical that the franchise agreement contains provisions to keep trade secrets, i.e., ingredients of a secret sauce, confidential and not disclosed.”<h3>Royalty and Fees</h3>Another significant area of concern is the payment of&nbsp;<a href="https://1851franchise.com/what-is-a-franchise-royalty-fee-2718389">royalty and fees</a>. Franchisees are typically required to pay ongoing fees, including royalty fees, which are a percentage of the franchisee's gross revenue. Franchisees may contribute to advertising funds, technology or software fees, and training fees. Excessive or undisclosed fees could strain the financial stability of a franchisee's business.&nbsp;And if a franchisee is not satisfied with a franchisor’s performance, stopping franchise royalty payments can also result in a breach of contract. This can give the franchisor leverage over them, even if the franchisor is not running a sound operation, according to&nbsp;<a href="https://www.yourfranchiselawyer.com/franchise-royalties-fees-can-stop-paying-im-unhappy/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=what-are-the-legal-risks-of-owning-a-franchise-business-2723320" target="_blank" rel="nofollow">Garner, Ginsburg &amp; Johnsen, P.A.</a><h3>Renewal and Termination</h3>Renewal and termination terms are equally important to understand. Franchise agreements have fixed terms. Renewal depends on meeting specific conditions such as performance metrics and adherence to standards, as well as paying renewal fees.&nbsp;Termination clauses allow the franchisor to end the agreement for non-compliance, poor performance or bankruptcy. Franchisees need to carefully review these terms to ensure they have a clear understanding of renewal and termination procedures, and can plan accordingly to safeguard their investment.Before investing, franchisees should be comfortable understanding and discussing the factors mentioned above, seek legal advice (if needed) and communicate with other franchisees to mitigate the legal risks associated with owning a franchise. Understanding the financial implications of fees, adhering to branding standards and being well-informed about the franchise agreement are very important steps to take when considering a franchise opportunity.

What Are the Legal Risks of Owning a Franchise Business?

1851 Franchise

Before buying a franchise, it is important to take legal risks into consideration to set yourself up for a successful investment.

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