Legal Insights for Emerging Franchisors: Key Strategies with Joe Fittante.
Starting a franchise system can be an exciting yet complex endeavor for emerging franchisors. Beyond the day-to-day operations and business strategy, it’s crucial to address a wide range of legal considerations that will lay the foundation for a successful and sustainable franchise model. From registration and disclosure requirements to intellectual property protection, supply chain integrity, and franchisee relationships, the legal framework surrounding franchising is essential for long-term growth. In this interview, Joe Fittante, President and Shareholder at Larkin Hoffman Daly & Lindgren, shares his insights on the key legal factors franchisors must consider when structuring their franchise relationships, as well as practical advice on managing legal complexities while supporting business objectives.
Joe Fittante
What are some key legal considerations when structuring a new franchise relationship for an emerging franchisor?
There are various legal considerations, but business considerations are just as important—scalability, margins, established processes, and the ability to teach, motivate, and enforce. If the underlying pillars of the system have not been established, it will be very difficult to achieve success. In terms of legal considerations, it is imperative to address the term of the relationship, the ability and conditions for renewal, the fees to be charged, the obligations of the parties, protections of intellectual property, conditions for transfer, dispute resolution, and post-term provisions.
How do Minnesota’s franchise registration and disclosure laws compare to federal regulations, and what challenges do franchisors typically face in complying with these?
Minnesota’s law is one of registration and disclosure, whereas federal law only mandates disclosure. A franchisor must obtain registration of its offering with the State of Minnesota before it can offer or sell franchises to residents of, or locations in, Minnesota.
How can franchisors best manage and maintain their supply chain integrity while ensuring it aligns with both legal standards and brand expectations?
Franchisors should thoroughly vet suppliers before allowing them to service their system. Any products or services integral to the franchise that are to be provided by suppliers should be reviewed and approved by the franchisor. Franchisors should also commit to performing regular quality assurance inspections at irregular intervals to ensure that the supplier’s facilities and products are consistently meeting the franchisor’s standards.
What steps should a franchisor take to protect their brand and intellectual property, especially when entering new markets or expanding internationally?
It is imperative that the franchisor secure its intellectual property before beginning to franchise. Ideally, the franchisor would have obtained federal trademark protection before starting the franchising process. At the very least, it should have applied for that protection. This strategy is even more critical when expanding internationally.
What legal factors must be considered when a franchise is transferred or sold, and how can franchisors ensure continuity and protection of their brand through such transitions?
The franchisor must conduct its own due diligence to ensure the buyer is a good fit for its franchise system and is qualified to operate the franchised business. The buyer will be required to undergo training by the franchisor, pay a transfer fee, upgrade the location to meet the franchisor’s then-current standards, and sign the then-current form of the Franchise Agreement.
Can you discuss common issues that mature franchisors face, particularly with regard to franchisee disputes, and how these can be mitigated through proper legal structuring?
In the life of any successful franchisor, there will, at a certain point, be tension in the franchise relationship. This tension may arise when franchisees no longer feel the franchisor is providing value for their royalty payments or when the franchisor believes locations need to be upgraded to meet changing consumer preferences. A Franchise Agreement that addresses both pre-dispute and dispute resolution processes and that provides the franchisor with the ability to require updates to the location, its equipment, and offerings during the term of the relationship is critical.
In your experience, what are the most critical aspects of a franchise agreement, and how can franchisors ensure that these are both enforceable and adaptable to changing circumstances?
The most important provisions in a Franchise Agreement are those that address the obligations of the parties during the term of the relationship. It is vital to ensure they accurately reflect the realities of that relationship. Additionally, the dispute resolution provisions are integral because they become crucial in the event of a dispute. In terms of enforceability, it is important that there is mutuality of obligation. Lastly, the provisions that address the parties’ obligations at the end of the relationship are also critical. These provisions need to address confidentiality, noncompetition, the ability of the franchisor to secure the real estate, and de-identification.
With supply chain disruptions becoming more common, how can franchisors legally safeguard themselves while supporting franchisees in times of crisis?
Franchisors need to have redundancy in their supply chain to ensure that if one supplier is unavailable, another can step in. Franchisors should also work with their franchisees to identify localized supply sources that may be less likely to experience disruptions. Moreover, franchisors should ensure their Franchise Agreements do not guarantee supply chain stability and that they include exculpatory language regarding sources of supply.
About Joe
Joe Fittante advises franchisors, both mature and emerging, on a variety of topics including structuring the relationship, registration and disclosure, supply chain, brand integrity, transfer and other system critical issues. He counts his clients as some of the most well-known brands in franchising. He routinely represents franchisors who are buying or selling franchise systems as special franchise counsel to advise on the health of the system and various other franchise issues. Joe is a past chair of the American Bar Association Forum on Franchising and frequent author and lecturer on issues important to the franchise industry.
Joe Fittante
President | Shareholder
Larkin Hoffman Daly & Lindgren
jfittante@larkinhoffman.com
Tel: 952 896 3256
www.larkinhoffman.com
