Franchises in Texas offer great opportunities for business owners or people who want to be business owners. We have all at one point or another done business with a franchise, whether that was to purchase food, other merchandise, or participate in some activity. But the laws pertinent to franchises can be complicated. Plus, there are federal and state laws to contend with. Failure to comply or uphold your responsibilities as a franchisor or franchisee can break your business.
A franchise is a business model where one person (the franchisee) buys a license from another (the franchisor), allowing them to operate a business under the franchisor's business name, concept, and branding. Well-known franchises include:
- Ace Hardware Corporation
- Burger KingDunkin'
- Century 21
- Hilton Hotels & Resorts
- InterContinental Hotels and Resorts
- Marriott International
- Pizza Hut
- Snap-on Tools
- Taco Bell
- The UPS Store
A franchise contract, or agreement, sets out the respective rights and responsibilities of the parties, the length of the arrangement, and other terms and conditions. Under a franchise contract, a franchisee typically pays the franchisor an initial fee as well as ongoing licensing and marketing fees.
For franchisors, this model is a lower-cost way to expand into a new market or geographic area. Franchising is attractive for franchisees interested in starting a business and looking to increase their chances of success by buying into an established brand.
The law around franchises, especially franchise contracts, is complex and varies according to each state's jurisdiction.
Factors to Consider when Selecting, Buying, or Selling a Franchise in Texas
No one – at least you should not – makes a rash decision to select, buy, or sell a franchise. You have to do your due diligence. The research and analysis may take time, but it will be worth it in the end. As you decide what to do with regard to a franchise – whether that is to select the franchise, purchase a franchise, or sell one – here are some factors to consider.
Selecting a Franchise
- Do your research. Buying a franchise is a big commitment, so it's important to thoroughly research franchises in which you may be interested.
- Consider what skills you can bring to the franchise. Identify any skill gaps so you can do the necessary training before committing to a franchise.
- Do a competitor analysis. If there are too many competitors in the franchise's market, it may be harder to differentiate yourself.
Buying a Franchise
- Confirm the franchising fees. Franchising fees typically include the initial franchise fee, ongoing royalty payments based on income (even if the franchise isn't profitable), and recurring advertising fees.
- Carefully read and consider the Franchise Disclosure document. This document sets out key operating details of the franchise, including its financial viability.
- Review your financing options. There are several ways to finance a franchise, including liquid capital, traditional or SBA-backed loans, lines of credit, and partnerships, to name a few.
- Read the franchise contract closely and seek advice. A franchise contract can be complex and assign a large degree of control to the franchisor over opening hours, uniforms, advertising, approved suppliers, and internal processes.
Selling a Franchise
- Carefully consider prospective franchisees. They will be representing your business so it's important to review their application closely.
- Properly complete the Franchise Disclosure Document. Under the federal Franchise Rule, a franchisor must disclose all risks, benefits, or limits of a franchise investment to the potential franchisee.
- Consider the various legal issues. These include drafting the franchise contract, setting the price, and protecting your intellectual property.
- Ensure you have sufficient capital. Until there are several operating franchises, starting a franchise can be an expensive process for the franchisor.
Regardless of whether you are interested in buying or selling a franchise, you should seek professional legal and financial advice before entering into a franchise contract.
How to Assign or Transfer a Franchise in Texas
If you want to leave a franchise before the end of the agreement without selling it, you need to assign it. This involves transferring the franchise contract to someone else. For example, you could assign the franchise to a family member who takes on your rights and responsibilities.
A franchise contract usually sets out the terms and conditions of a transfer or assignment. Typically, it requires the franchisor's approval and payment of a transfer fee.
How to Sell a Franchise in Texas
When you sell a franchise, a new franchise contract is created and signed by the franchisor and buyer.
Again, the specific terms and conditions of selling a franchise are typically set out in the franchise agreement. Like a transfer, the sale of a franchise usually requires the franchisor's approval. It also often requires the franchisee to offer to the franchisor to buy back the franchise at the same price offered to the buyer.
How to Terminate a Franchise in Texas
The termination of a franchise is covered by the franchise contract. The termination clause sets out whether, when, and how either party can end the contract.
A standard termination clause allows a party to end the agreement if the other party fails to comply with a term of the contract and fails to resolve it within a reasonable amount of time.
Situations allowing a party to terminate a franchise are many. For example, if a franchisor misrepresents the franchise's potential profits, that could be a cause for termination. As another example, if the franchisee fails to make regular royalty payments or loses a license needed to run the business, either of those events could be a cause for termination.
Elements of a Franchise
The elements of a franchise are dependent on state law, but generally speaking, there are three characteristics.
- Brand. The franchise uses the trademark already established.
- Marketing. The franchisor likely decides the franchisee's marketing strategy.
- Fees. The franchisee typically pays fees to the franchisor for things like training and licensing.
The combination of these three elements is not typical of any other business relationship.
Federal and State Franchise Laws
The franchise business is governed by both federal and state laws. An overview is given here, but it is important to have a thorough understanding of all the laws applicable in your jurisdiction because non-compliance can result in the end of your business.
At the federal level, franchisors must comply with the Federal Franchise Rule. 16 CFR Parts 436 and 437. The Franchise Rule requires franchisors to provide adequate, material information to prospective purchasers of their franchise so that these potential buyers can weigh the benefits and the risks. Specifically, franchisors must provide Uniform Franchise Offering Circular documents outlining 23 items of information about:
- The franchise;
- Its officers; and
- Other franchisees.
The Federal Franchise Rule is implemented and enforced by the Federal Trade Commission (FTC).
State laws vary in terms of the laws that govern franchises. Applicable laws may include your state's:
- Disclosure laws, which include information contained in the FDD for franchise registration states and UFOC documents for franchises in all states (because this is a federal requirement) – disputes often arise when claims made by the franchisor misleads a franchisee, and poorly drafted or deliberately misleading UFOCs are often the cause
- Relationship laws, which are laws that define the roles and existence of a franchise, allow state courts to determine whether a franchise exists even if not necessarily established as one originally
- Registration laws, which refer to your state's requirements for registration, and your state may follow any of three registration types: (1) franchise registration, the most stringent type, requires Franchise Disclosure Documents (FDD); (2) franchise filing requires a one-time or annual state franchise filing for states following this type; and (3) non-registration, the most popular type among states, does not require any sort of state-specific FDD registrations or filings
These rules and laws are significant and quite complicated and intricate. Speaking to a franchise attorney in Texas is your best means to ensure you comply with all relevant laws regardless of whether you are the franchisor or franchisee.
Legal Franchise Services in Texas
As your franchise attorney at f, we offer a number of legal services. These services may vary depending on your franchise, whether you are the franchisor or franchisee, and in what stage of your franchise you are.
Legal Services for Franchisors
- Draft, review, and negotiate franchise plans
- Registration, if applicable
- Draft disclosure documents (e.g., UFOC)
- Compliance with the laws, regulations, and rules
- Ongoing legal advice and counsel
Legal Services for Franchisees
- Review and analyze disclosure documents (e.g., UFOC)
- Review and analyze franchise agreements
- Review and analyze sale/transfer agreements
- Ongoing legal advice and counsel
Common Reasons for Franchise Litigation in Texas
With all your best efforts, you may not always be able to avoid conflicts or disputes. Here are common causes for litigation in Texas.
- Antitrust, where franchisees believe their rights to competitive advantage have been violated
- Breaches of contract, where one party violates an agreement (e.g., franchise agreement or third-party vendor agreements)
- Disclosure violations, where information was not properly disclosed prior to a franchise purchase
- Discrimination, where franchisors have a bias or preference for one over another franchisee
- Encroachment, where a peer franchisee may attempt to work in the same area but is prohibited by a franchise agreement
- Franchisor fraud, where franchisors deceive investors or others and the FTC seeks damages
- Payment disputes, where franchisees fail to pay fees for whatever reason (legitimate or not)
The above are only examples, but there are countless reasons disputes arise and having a working relationship with a franchise attorney in San Antonio can help you proactively resolve disputes or prepare you for when going to court is necessary.