Budding New Jersey Entrepreneurs: Is Franchise for You?

With the economy rebounding, many budding entrepreneurs are starting to explore new business opportunities again. For those who are not quite ready to jump back in feet first, a franchise may be the way to go.

A franchise is a legal relationship between the owner of brand (a trademark, service mark, trade name, etc.) and another entity seeking the right to use that brand in the sale of goods and services. The franchisee may also enter a broader relationship in which the franchisor provides products, training, and marketing assistance. Common franchise examples include car dealerships, restaurants, fitness clubs and personal services like tax preparation.

Because you are buying into a proven business idea, a franchise carries fewer risks that starting a new business from scratch. In fact, the success rate of franchise-owned businesses is considerably higher than traditional small businesses.

Of course, there are still a number of risks. As with every business opportunity, you must conduct due diligence. Issues to consider include:

• The likelihood of success: Factors to consider the potential market or demand for the product or service; the necessary resources (time and money) you will have to contribute; and potential competition in the area.
• The reputation of the franchisor: Factors to consider include the financial condition of the franchisor; the legal history of the franchisor; and the success of other franchises in the area.
• The franchise agreement: Franchise owners must also thoroughly review the franchise agreement to make sure that they fully understand their rights and obligations. These agreements are often drafted to heavily favor the franchisor and should be negotiated to better protect your interests. Issues to consider include licensing fees, inventory, renewal and termination rights, competition/territory restrictions, equipment and premises leases, and

While you should conduct your own independent research, the Federal Trade Commission also requires franchisors to provide each prospective franchisee with a disclosure document. The document must be provided at least 10 business days before any purchase may occur. Required information includes a fully audited financial statement; contact information for other franchises; cost required to start and maintain the business; and litigation involving the company or its officers.

Franchise agreements almost always, if not always, have a clause saying that the agreement supersedes any promises or representations that are not included in it. All too often franchise salespersons make promises and representations to prospective franchisees that are not fulfilled nor are they enforceable.

A franchise can be a wonderful business opportunity, but it is also full of traps for the unwary. The best way to protect yourself is to consult with an experienced business attorney.

If you have any questions about opening a franchise or would like to discuss the legal issues involved, please contact me, Joel Kreizman, or the Scarinci Hollenbeck attorney with whom you work.