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Key Legal Protections – A Primer for Franchisors

While most, if not all, large-scale franchisors no doubt have a healthy and well-staffed legal department, other franchisors (over 3,000 and counting) may not necessarily have the resources to prepare proper legal protections for their brands. In this week’s Proven Match blog, we’ll delve into a primer for the type of legal protections necessary to ensure a smooth operation. As the following is just a primer meant to encourage discussion and contemplation, you should always rely on accredited counsel for all legal matters, preferably from an accredited and qualified franchise attorney specializing in the industry.

It’s a fact that any and all franchisors must disclose any pending litigation issues as part of their Franchise Disclosure Document (FDD). And according to FranDATA Research, three-quarters of them report no legal issues whatsoever. This is likely attributed to court rulings and established case law which has offered typically decent protection from lawsuits which might befall franchised brands. Because most franchisors go to great lengths to write iron-clad franchise agreements, there’s often little room for the type of misunderstandings or misgivings which could later blossom into an annoying legal issue.  

According to most industry experts, key legal protections for franchise brands typically fall into two categories, violations of franchise law and fraud within the sales process—but both are easily preventable occurrences. 

Take violations of franchise law. Regular training and review for your staff and employees in the most common types of franchise law violations is an excellent start. For instance, we all inherently know that it’s wrong to make specific claims related to future success, such as “become a franchisee is our system and you’re guaranteed to get rich, making $200,000 your first year!” That’s simply not how it works. As a tactic, some franchisors even go so far as to institute a role-playing exercise with their sales force to root out inconsistent and unlawful communication occurrences.

This type of diligence extends to all printed materials as well and includes franchise contracts, disclosures, and the aforementioned FDDs. All should be reviewed and blessed by a competent attorney who specializes in franchise law. Another pro-tip? Designate at least one corporate employee as a compliance manager for all things legal. This candidate will make sure that the brand is up to date with all of the latest legal findings, updates, and assurances, passing them along to the rest of the team. In addition, they can be in charge of simple compliance duties, such as making sure that all correspondence with potential franchisees and the brand are documented, stored and filed correctly. 

As for legal issues by a franchisee reflecting back on the franchisor, this territory is called vicarious liability. Close monitoring of compliance issues already spelled out in the franchise agreement and contracts should protect the parent company, but these areas must be regularly reviewed and renewed. Here’s a point in your favor—typically, when issues of vicarious liability arise, the law is usually on the side of the brand. Due to the fact that the franchisees are set up as independent business owners, the courts see them as in control and custody of their own actions and that of employees on their behalf. If a vicarious liability issue does arise, it should be dealt with swiftly and professionally, and designed to provide protection to the franchisors for any claims therein.

A famous wit once referred to lawyers as “…the only people whom, when playing a board game, bother to read the rules on the inside of the box top.” That’s good for a laugh because the legal profession isn’t for everyone. However, we often resent them to the same degree we depend on them to guide our business principles and practices. Make sure your franchise operation is on sound footing with a qualified and accredited franchise attorney. It’s one of the best investments you can make.

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As a franchisor, you’ll want to know which existing and potential franchisees best fit your business concept. Proven Match is the proven solution in determining those factors. Through our proven behavioral assessment techniques, predictive analysis becomes a predictive success for your franchise concept. If you’re ready to show your leadership by getting started, give us a call and we’ll put you on the path to a more productive year in 2017.

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