Bay Area Business Legal Counsel For Franchisees and Those Considering Purchasing a Franchise
Our San Jose Business Attorneys offer experienced business attorneys skilled in providing legal counsel concerning all aspects of franchise businesses. We will help you determine whether a potential investment agreement is really a franchise — one that may not have complied with California’s Franchise Investment Law. We frequently assist small business owners in evaluating the many contractual obligations involved in the purchase of a franchise. We will study the Franchise Agreement and Uniform Franchise Offering Circular (UFOC) and point out provisions the client may not immediately understand. We also check for any alerts posted by the Department of Corporations relating to the particular franchise. Our San Jose business lawyers can offer you the experience of having studied scores of franchise agreements for our clients.Evaluating Whether a Business Investment Is a Franchise
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Just as in the case of securities, the California Department of Corporations is the state agency that regulates the offering and sale of franchises in California. The policy behind California franchise regulation is to protect individual investors by requiring that anyone offering to sell franchised businesses in California disclose specific information to the Department and to each potential investor. The latter information is typically supplied to the individual investor in a Uniform Franchise Offering Circular containing various financial disclosures, risk factors facing the franchise business which may affect the future success of the franchise business, and disclosures of liabilities, among others. Anyone offering franchises in California must comply with these requirements. To skirt the law, sometimes a franchise offering is simply not called a “franchise offering.” However, as veteran business lawyers, we know that if the business proposal quacks like a franchise, it probably is a franchise. The California Department of Corporations has provided guidance on what elements make a franchise agreement a franchise agreement, these are:
1. “A right must be granted to the franchisee to engage in the business of offering, selling or distributing goods or services;
2. The right must be granted to engage in the business under a marketing plan or system prescribed in substantial part by the franchisor;
3. The operation of the franchisee’s business must be substantially associated with an advertising or other commercial symbol designating the franchisor or an affiliate of the franchisor, such as a trademark, service mark, trade name or logotype; and
4. The franchisee must be required to pay, directly or indirectly, a fee or charge, known as a ‘franchise fee,’ for the right to enter into the business.”
(Gary Mendoza, Comm., Release 3-F, “When Does an Agreement Constitute a Franchise?” (1994).)
Why Purchase a Franchise Business?
The potential investor in a franchise business should understand the essence of what he or she is buying. Essentially, a franchise is a license to operate a business in strict accordance with a set of business methods and under recognized trademarks or service marks. Such an investor will always benefit from asking him- or herself whether the business model licensed by the Franchisor is truly so unique and valuable as to warrant the franchise fees that must be paid to the Franchisor throughout the life of the business. In many cases the value comprised by the various and extensive business operating methods embodied by the franchise business will be great and an average new business owner would not be capable of formulating similar complex business methods without years of trial and error. Additionally, the customer good will represented by the trademarks or service marks that distinguish the franchise business are generally also very valuable and would likewise be difficult to replicate by the small business owner starting from scratch.In some markets, dominated by only a few major players, it might be next to impossible for a small independent start up to succeed without some major distinguishing factor from its larger competitors. For example, this would be more true in San Jose, where there are more chains than in San Francisco, where there are fewer chain restaurants and retail establishments on average. In an environment such as a new strip mall in San Jose, a franchise business — with all its established business methods, marketing strength, name recognition, and scale — might be the best and most secure way for a small business entrepreneur to enter the market. However, in other markets, the value of the franchise business methods and trademarks may be worth significantly less, and a particularly creative and experienced entrepreneur might well create a set of business methods and trademarks just as effective on his or her own without agreeing to pay a franchisor a percentage of revenues throughout the life of the business.
The California Department of Corporations has published a concise and useful guide for the potential buyer of a franchise, entitled “ Look Before You Leap – A Guide to Buying a Franchise” which many clients find helpful.