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Top 3 Legal Issues Facing Franchise Owners

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By Andrew Lu on September 17, 2012 6:50 AM

Starting a franchise may be a great way to become a small business owner, without going through a lot of the growing pains that small business owners typically go through. However, franchising also has a lot of unique legal issues that other small business owners don't face.

With a franchise, the advantage for a business owner is that he or she is not starting from scratch.

Instead, the business owner (franchisee) is able to start with the brand, name recognition, and customer loyalty of a much larger chain (the franchisor). In exchange, the franchisee has to pay the franchisor a fee and possibly royalties on every sale.

However, starting a franchise may not be for everyone as there are many complex legal issues involved. Here are three common legal issues you should consider before investing in a franchise, as provided by MegaDox:

  1. Franchisor does not provide complete disclosure of material facts. Many jurisdictions have full disclosure laws which demand that franchisors provide franchisees with full, true and clear disclosure of all material facts related to the franchise. This can include information about the franchise's financial health, pending legal issues, or anything else that could affect the business. If the franchisor misleads or omits key information, the franchisor could be breaking the law.
  2. Not providing ongoing support. A franchisee usually expects a certain level of support from the franchisor as set forth in the franchise agreement. However, in many cases, a franchisor's support quickly evaporates after it collects the franchise fees. A franchisor may be in violation of the franchise agreement if it does not provide the promised level of support or training.
  3. Establishing too many competitors. If your franchise agreement doesn't set forth how many franchises the franchisor can set up in an area, you could find yourself competing with many of the same businesses as yours in a given area.

If you're thinking about starting a franchise, you should be aware of the many legal issues surrounding franchises. If you are new to business, it's probably a good idea to hire a small business attorney to review the franchise agreement.

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