Franchise Assignment Lawyers

Occasionally a franchisee (i.e., one who has bought and operates a franchise) will want to assign his rights in the franchise to a third party (referred to as the “transferee” because the privileges are being transferred to him) for either practical or personal reasons.

What Is a Franchise?

A franchise is a legal and commercial association between the owner of a trademark, service mark, trade name, or advertising logo and an individual or company seeking the privilege to use that identification in a business. The franchise oversees the process of conducting business between the two parties. Typically, a franchisee sells goods or services provided by the franchisor or sells goods or services that meet the franchisor’s quality standards.

Franchising is founded on mutual trust between the franchisor and franchisee. The franchisor delivers the business expertise (i.e., marketing plans, management advice, financing help, site location, training, etc.) that otherwise would not be open to the franchisee. The franchisee brings the entrepreneurial spirit and drives required to grow the franchise.

While franchising structures have been in use since the Civil War, only recently has tremendous growth occurred in franchising. By the end of 1985, 500,000 organizations in 50 industries earned gross sales of over half a trillion dollars and engaged 5.6 million full and part-time workers.

Franchising created 18,500 new businesses in 1991 and roughly 108,000 new jobs for the economy. Business format franchises encountered sales gains of 8.9 percent from $213.2 billion in 1990 to 232.2 billion in 1991. Industries that depend on franchised businesses to disperse their products and services touch every facet of life, from car sales and real estate to fast food and tax preparation. Therefore, franchising is a feasible, lucrative business option.

There are mainly two forms of franchising:

• Product/trade name franchising
• Business format franchising

A franchisor owns the right to the name or trademark and sells it to a franchisee in the simplest form. This is known as “product/trade name franchising.” In the more elaborate structure, “business format franchising,” a more comprehensive and continuing relationship exists between the two parties. Business format franchises usually deliver a full range of services, including site selection, training, product supply, marketing plans, and even help in getting financing.

What Are the Advantages of Being a Franchisee?

Some benefits of being a franchisee may include:

• Established product
• Quality control
• Opportunities for growth
• Expansion
• Limited risk
• Equity investment
• Bulk purchasing
• Cooperative advertising
• Service costs assistance

What Are the Disadvantages of Being a Franchisee?

The cons of being a franchisee may include:

• Overdependence standards
• Less operating capital
• Restrictions on freedom of ownership
• Limited capital

Determining the Franchisor’s Obligations

One of the most challenging judgments any entrepreneur encounters is whether or not to buy a franchise. And while purchasing a franchise means acquiring a full approach to doing business, there is no security for success. Being mindful of the franchisor’s obligations takes some guesswork from the decision-making procedure.

An essential effort in making an informed determination about buying a franchise is to understand the obligations the franchisor is legally bound to satisfy. Learn as much as you can about the franchise and the franchisor’s duties before entering a purchase agreement or before meeting with the franchisor or their agent to discuss the prospect of buying a franchise.

The FTC demands in all states that a lengthy disclosure document and financial statements be given to franchisees before purchasing the franchise. The franchisor must originate internal controls and guidelines to ensure ongoing obedience to regulations in addition to state filing fees, printing and accounting, and legal costs.

Franchisors are obligated to:

• Give you a copy of the franchise agreement, other contracts, and the franchisor’s financial statements: The franchisor, nonetheless, cannot, under federal law, make claims regarding the amount of money you will make. The UFCO will reveal estimations of all initial start-up costs.
• Deliver one week of training to you, the franchisee, and your manager in one of the parent stores, the operational manual, and continued help and aid to you and other franchisees.
• Deliver policies on audits and assignment instructions and any additional franchisor criteria for approving an assignment (e.g., ownership rights – franchisee rights to sell the franchise if it becomes prosperous).
• Provide information on the franchisee’s initial expenses and other costs (e.g., royalties, promotional fees).
• Supply franchisees with a marketing strategy, promotional materials, and area site selection aid.

What Does It Mean To Allocate Franchise Rights?

The basic rights that you (as a franchisee) can assign to a third party will depend on whether you have bought an “entire business format” or a “product distribution” franchise from a franchisor. Giving these rights to a third party means you agree to forfeit all control over them and transfer such authority to the third party looking to buy them.

If I Want To Assign My Franchise Rights To A Third Party, What Should I Do?

In most franchisee assignment cases, there are two things a franchisee must do before he can assign his rights to a third party:

• Give notice of the assignment to the franchisor: In advising a franchisor that you wish to assign your right, you must always specify to whom you plan to assign your rights. Franchisors will usually require that you include the name, address, financial capabilities, and business background of the transferee so they can determine if they wish to agree to the assignment.
• Get the franchisor’s consent to the assignment: Generally, franchisors have “anti-assignment” clauses in their franchise agreements that restrict the assignment of the franchise without the franchisor’s approval. Courts have typically found these clauses reasonable, allowing the “franchisor” to refuse consent to an assignment if they desire in many cases.

Can Franchisors Refuse Assignment Of Franchise Rights Whenever They Want?

Although most states acknowledge that franchisors have the right to limit the sale or transfer of the franchise, this right is generally not unconditional. The extent of this right differs depending on the state where you live.

Some of the more typical limitations placed on a franchisor’s right to consent are:

• Statute of limitations: Some states require that a franchisor refuse or give his consent within a specific period (usually around 60 days). If the franchisor fails to do this, he has implicitly granted his consent.
• The franchisor must be reasonable or non-arbitrary in refusing consent: Such cases are generally governed by the standard assignment laws.

What Happens If I Improperly Assign My Franchise Rights?

Failing to inform the franchisor of your assignment or doing so without his permission is ill-advised. Depending on whether the anti-assignment clause is constructed correctly, a franchisor may have an action for damages or have a court declare the assignment invalid.

Do I Need An Attorney If I Wish To Assign My Franchise Rights?

A business attorney retained for a franchisee will analyze the language of an anti-assignment provision with great care to determine its proper effect. Additionally, an attorney experienced with contracts can inform you of the steps you must take to assign your franchise rights to a transferee legally.

Since franchises are generally costly enterprises, you must ensure that you know what you are doing before attempting to assign your rights. This will prevent a franchisor from taking action against you.