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Litigation Involving Franchise Earnings Estimates or Earnings Claims in California

One of the largest areas of disputes between the franchisor and franchisee relates to what are known as "earnings claims" - the estimate of what the franchisee will earn by purchasing the franchise. When things don't go quite according to plan the relationship between the franchisor and franchisee becomes strained. Franchisees will often point to claims made by the franchisor or their representation during the time of their initial discussions prior to the purchase of the franchise itself. They may claim that the franchisor or their representative(s) overpromised or exaggerated earnings estimates, and attempt to use this as the basis for a lawsuit.

I want to sell my franchise, do I need an attorney?

The sale of any franchise or business would be less than prudent if the seller did not have the protections outlines in a detailed Buy-Sell agreement. As a Seller you purportedly do not want to remain on the hook for more than absolutely necessary. Its not just about getting your purchase price, it is about becoming legally absolved from further liability where you can. And if you are carrying back a note for some of the purchase price, then you are still tied to the business, and potentially tied to the success of the business. Careful documentation of the details of a cary back note and obtaining security are critical, since if the business has cash for problems, you may be the first to NOT get paid. You definitely want to have security separate and apart from the business---do you really want to take back over the business? If so, this needs to be properly documented not only with the Buyer but with the Franchisor. Having legal counsel assist you with the documentation is critical since years later debtors of your buyer may start calling you again if the buyer defaults. Having a business broker is not enough, even if they provide a "form" assets purchase agreement. These are woefully deficient. There is no substitute for real legal counsel. The small investment today will save huge headaches and potential litigation in the future.

My franchisor will not approve the sale of my franchise to a qualified buyer.

The franchise agreement contained in the Franchise Disclosure Document or FDD generally has detailed provisions for the approval process of a buyer of your franchise, but a franchise agreement can be more vague and just say within a reasonable period of time. Sometimes the franchisor will take more than a reasonable time in attending to this matter for a multitude of reasons. Perhaps the buyer is not exactly what they want but can not really deny the qualifications. Perhaps the longer the franchisor delays the more fees you rack up they will demand at closing. Perhaps they want to buy the franchise back from you but do not like the terms they would have to meet and want your buyer to go away so they can make you a lower offer. All of these actions are unreasonable actions potentially causing a franchisee damages. If this is happening to you, an experienced franchise attorney can help you make the appropriate demands onto the franchisor and outlining your rights and potential damages. Franchisors generally will not take your complaints too seriously when coming from you the franchisee, but should take those demands from an experienced franchise attorney representing you very seriously. Where there are very real damages (lost a good buyer), the matter becomes must more serious and the Franchisor does need to understand the legal ramifications of the inaction.

What Happens If My Franchisor Changes the Franchise System?

Franchisors will change the system of doing business which you purchased, whether it is for style and design changes, or to change the required equipment package, or other required elements of operating the franchise. The question is, how much is too much too soon, and what does the existing franchisee have to do to. There are various options when this happens and depending on the changes,and the cost and why the franchise agreement states, will depend on your options. If the franchise agreement is silent about updates to the franchise system in terms of cost or frequency, then there is always room to negotiate with the franchisor about timing of implementation or reductions in fees to fund the cost of improvements. Franchisors are generally willing to work with a franchisee in order to have the updated system reflected in the network. However if the franchisor will not work with you and the updates are unreasonable in cost, timing of implementation or are not being required of every franchise similarly situation, you have rights in not being forced to expend unreasonable sums in an unreasonable timeframe. If not all similarly situated franchisees are being required to make the updates, this is called selective enforcement and is similar to discrimination. In a nutshell, selective enforcement in this manner is completely improper. I can help you negotiate a workable solution or if necessary negotiate a termination of your franchise agreement.

How Can I Get Out of My Franchise Agreement or Terminate My Franchise Agreement?

Franchisees very often want to end their franchise agreement relationship for any number of reasons. Sometimes it is because they simply run out of money and can no longer afford to pay the ongoing fees, sometimes they need to sell their franchise and every buyer that comes along wants the business but not the franchise, sometimes it is because the franchisee and franchisor simply do not see eye to eye anymore on the direction of the business. Franchise Agreements are written very one sided in favor of the franchisor, giving the franchisor all the rights to terminate the agreement, but rarely is there a provision for the franchisee to terminate the franchise agreement. Seek advice from a California Franchise attorney such as myself who has walked the walk as in-house counsel to an international franchise system. There are various options the franchisee would not necessarily think about or know about. It's not all about threatening litigation against the franchisor based on either perceived or very real shortcomings of the franchisor in an effort to intimidate the franchisor. That is standard practice and response of a litigator. I am not a litigator. I am a problem solver and will solve your problem and advise you of the options and how to implement a solution.

Do I Need a Trademark to Franchise My Business

In general yes, since the California Franchise definition of a franchise includes payment for your trademark used in connection with your system or in connection with a marketing plan. If you have a name or a logo that you want to be part of the system you are going to license as a franchise then you ultimately need to and should have it trademarked. This affords you the protection of no one defeating YOUR use of the name and your right to license it. Having the federally registered trademark also gives you the right to determine under what conditions you will license (franchise) the name. This is why franchise agreements seem so one sided in favor of the franchisor. That's because it is the franchisor's property, the trademark, that needs to be displayed in accordance with exact specifications and conditions so as to promote the good will of the brand as a whole.

What Is a Trademark and Is a Trademark expensive?

A trademark is a federal registration of a name, slogan, logo or design that, when issued, gives you what's called "infringement rights"--a set of rights to be able to prevent almost all others in the entire country from using the same name, slogan, logo or design in a similar manner or any confusingly similar manner. In addition, a trademark registration is an asset, which can be sold or transferred, used as collateral, or , handed down to your heirs. A California Trademark registration is not the same as a federal trademark registration in the United States Patent and Trademark Office in Washington D.C. and does not afford you the same rights as a federal registration. A Trademark need not be expensive to obtain. As an experienced Franchise attorney who deals with trademarks all the time, I can guide you through the options and choices you have for obtaining a federal trademark registration. In many cases the total fees are well less than you would imagine. You may only need a single class of product or service to protect you which can cost as little as $275 filing fee plus preparation of the application and/or search for similar marks. Find out today if your name is a good candidate for trademarking.

Can You Franchise a California Service Business?

Absolutely! More and more California service business franchises are popping up, everything from home care to painting to handyman to computer repair to accounting, ever hear of H&R Block? The original service franchise. It's a bit trickier because the technician employees ARE the product you would be selling, so franchising a service business is in effect franchising the business model of providing technicians. All the same requirements of having systems for your business apply to the franchise model for device businesses, excel instead of franchising how to ordering product from suppliers, you are franchising how to contract with or employing technicians to provide the services of the business. Since the technicians need to be skilled, the business model will be focused more on how to find the right technicians, as well as managing them. As an experienced California franchise attorney I can help you navigate the differences in how to put together your business model for franchising your service business.

Can I Franchise My Business?

What makes a business a good candidate for Franchising? Almost any business can be franchised. Franchising is basically licensing the methods, processes and systems that make up your business. As an experienced California Franchise Counsel,I tell my clients who are wanting to franchise to make sure you have or create these systems of doing business and physically write them down- EVERYTHING: Determining a suitable location, size of site and type of building, negotiating the lease, hiring contractors for the tenant improvements, creating the exact specifications for the layout, design and furnishing of the location, finding the appropriate vendors and suppliers, determining how much inventory to maintain and operate, how to hire and fire employees, how to manage the books, how to market, promote and advertise the business, how to handle returns or refunds, how much insurance to get and types, how to budget for fixed expenses and variable expenses, and about a hundred other things that the client has learned over time with trial and error in establishing their own business. That is the first key to being able to franchise your business, to be able to duplicate it over and over with people other than YOU operating those businesses. Once you must have all your business systems well documented such that you can teach those systems and methods to others, you are in an excellent position to be able to license your business systems. Basically franchising is a teaching business-you will be in the business of teaching others how to do what you have done well.

When is an Impound Account Required by a New Franchisor

In California, typically a new franchisor will be required by the Franchise Department to "impound" the upfront franchise fee. Impounding means the fees must be deposited in a State Mandated Escrow Type Account, until all the franchisor's pre-opening obligations have been satisfied. Then the franchisee has to certify that all of the franchisor's obligations have been met before the State will release the funds to the Franchisor. Franchisors obviously don't want to see their fees impounded because it delays access to their money. From a legal perspective,the Franchise Disclosure Document must clearly specify what a franchisor's pre-opening responsibilities are, and how they will be met. It's usually upon the physical (or virtual) opening of the franchise. In many cases this is simply a matter of training. In a brick-and-mortar situation it usually coincides with the physical opening of the business. The key to reducing the time you sell a franchise and the time you collect the upfront franchise fee from an impound account, is to minimize the pre-opening responsibilities. I advise my clients how best to position their pre-opening obligations to meet the legal requirement as well as the franchise business requirements. There are ways to avoid the impound requirements.

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