Is a franchise more profitable than an independent business?
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Is a franchise more profitable than an independent business?

On behalf of Mario L. Herman posted in Franchise Law on Monday, March 7, 2016.
A prospective franchisee may question what leverage he or she has in negotiations against a franchisor. After all, a franchise is an established business.

Presumably, a prospective buyer wants in on the franchisor’s business because of its success. As a law firm that has helped many prospective franchise buyers conduct due diligence, we understand that a good deal can be a win-win for both sides. For example, studies indicate that company-owned business sites are not as profitable as franchises, on average. Small wonder, then, that franchisors want to expand and that the idea has caught on so rapidly across the country.

Yes, franchisees have something to offer franchisors. However, an individual, prospective buyer often lacks the resources of an established franchise company. The company may have its own legal department and standard contracts that it uses. Perhaps because of that disparity, the U.S. Federal Trade Commission entered the fight. Using its authority under the Federal Trade Commission Act, it has led coordinated sweeps against franchisors for alleged unfair methods of competition, or deceptive or fraudulent business acts. Over twenty states have also passed laws regulating franchise sales and/or relationships. However, federal franchise legislation has yet to be adopted.

Given that legal patchwork, a prospective franchise buyer has good reason to exercise caution. At a minimum, consulting with an experienced franchise lawyer will help a prospective franchise buyer make a more informed decision. An attorney can also navigate the complexities of the applicable state laws.

Even if a state has not passed franchise regulations, the principles of contract law generally apply. An attorney can help a prospective buyer protect his or her rights.