Louisiana business startup: to franchise or not to franchise?
The decision whether to become a franchisee is complex; legal counsel can provide significant guidance.
The franchise is a popular business model when one party – the franchisor – enters into an agreement granting the other – the franchisee – the use of trademarked material like brands, logos, symbols and names to sell associated goods or services, usually within a set geographical area, in exchange for a periodic fee. The franchisor retains a level of control over the business operations of the franchisee, including assistance and support.
Of course, establishing a local franchise allows the franchisee the benefit of an already-established, often well known brand, but a potential franchisee must consider whether the relationship would be financially profitable and whether having the franchisor exert control and guidance over operations would be helpful and welcome, or intrusive.
Franchise law is extremely detailed and precise, controlled largely by federal law and heavily regulated by the Federal Trade Commission or FTC. In particular, federal law requires fair business practices by franchisors. For example, a franchisor must provide a potential franchisee with a required, detailed disclosure document at least 14 days before any franchise sale agreement or payment starts the franchise relationship.
Louisiana does not have a comprehensive statutory scheme governing franchises, but state law does reach franchises in some ways. For example:
- Louisiana law regulating restraints on business and competition allows a franchise agreement to require the franchisor to refrain from doing business within an agreed geographical area and the franchisee may be required to refrain from competing with the franchisor and affiliated franchisees during the period of franchise and for up to two years after it ends.
- Louisiana business organizations law requires that, unless the franchise agreement provides otherwise, if a franchise operates exclusively in the state, disputes under the agreement must be resolved in Louisiana courts and interpreted under Louisiana law.
- Louisiana law regulates “business opportunities” that are similar to franchises under federal law; a franchise may also need to be careful to comply with Louisiana business-opportunity laws for this reason.
- And more.
Because of the significant regulation of franchises, any Louisianan considering the franchise as a potential business opportunity should engage a business attorney who is very familiar with this area of law. Legal counsel can help such a client decide whether this business model is right considering the business person’s goals and experience, as well as whether the potential franchisee has the capital, assets and creditworthiness to meet the financial requirements of the agreement and also allow sufficient financial cushion.
A franchise lawyer can also assist the client with analysis of the disclosure statement of any franchisor being considered. Counsel should also carefully draft or review a proposed franchise agreement for compliance with applicable law and to negotiate terms beneficial to the franchisee.
Statistics about franchise success vary broadly depending upon the source, so an individualized analysis of each situation is important. It can also be valuable to contact present and previous franchisees affiliated with the particular franchisor.
Franchise attorneys of Dunlap Fiore, LLC, in Baton Rouge, represent clients considering becoming franchisees, as well as businesses acting as franchisors.
Keywords: Louisiana, franchise, franchisee, startup, business, franchisor, trademark, control, brand, FTC, disclosure document, business opportunity