Creative Solutions That Are Cost Effective

A franchise business opportunity might appeal to you because you receive support from a stable franchisor. However, you should treat the franchise relationship with the same caution as any other business model. You and other potential franchisees must understand Arizona franchise law, the difference between a franchise registration state and a federal franchise state, and how a franchise agreement works.

Anthony Law Group, a renowned business lawyer in Phoenix, AZ, helps business owners find their footing in an ever-shifting ecosystem. Our team outlines below what you should know before entering into a franchise agreement.

What Is a Franchise Agreement?

First, let us examine the franchise definition. A franchise is a business chain owned by the franchisor’s brand and operated by its franchisees. While the franchisee profits from their franchise location, they pay the franchisor for operational costs.

Meanwhile, the franchisor manages and distributes a unified marketing plan while franchisees operate under the franchise service mark or other commercial symbol. Both parties must ensure that the franchised business operates according to:

• Arizona franchise law: Since Arizona is not a franchise registration state but a business opportunity state, franchises must operate in accordance with business opportunity laws.
• Federal franchise law: Federal franchise law determines how franchise relationships work so that franchisees can make informed decisions about their business opportunities.
• The Federal Trade Commission’s franchise regulations: The FTC establishes rules that help enforce federal franchise law and prevent franchise disputes by outlining how all parties should conduct themselves.

What Should You Know About Federal vs. Arizona Franchise Law?

A franchise registration state differs from states that follow business opportunity laws in that it authors and enforces franchise-specific laws. A franchisor must receive approval from the state and register their franchise chain locations separately. Meanwhile, business opportunity laws do not require that a franchise distinguish itself from other businesses.

If a franchisor has a federally registered trademark, it does not have to file notices with state regulators. However, the Arizona House of Representatives did introduce a 2023 proposed law that would require more regulation for franchise relationships between franchisees and their franchisors. Keep possible regulation changes in mind when entering into a franchise agreement.

Now, what does federal law say about franchise relationships? The Federal Franchise Rule protects franchisees by ensuring they have all the information necessary to wisely invest in the franchise. Your franchise disclosure document should honor any state and federal franchise laws that apply to you.

What Does a Well-Rounded Franchise Disclosure Document Contain?

What should your franchise disclosure document include? First, you should understand the specifics of the Federal Franchise Rule and Arizona franchise law before you sign anything. These directives make up a substantial part of how your potential franchisor writes the franchise agreement.

You will find some common elements included in a Franchise Disclosure Document below.

1. Financial Requirements

The building, products, equipment, and other assets belong to the franchisee’s business. However, the franchisor owns the franchise brand. Therefore, your purchase and involvement come at varying costs:

• Purchase price: You will pay an initial purchase price to cover your franchisor footing the initial startup bill.
• Continued operational costs: Franchisees typically lease their business property, purchase products or other materials, and pay marketing royalties.
• Additional fees: Some other expenses may arise related to your franchise ownership, such as furnishings purchased to enhance your location’s performance and brand adherence.

Your Franchise Disclosure Document should cover these costs in depth.

2. Business Operations

When you operate under a franchisor’s trademark, you adhere to the pre-existing franchise operational requirements. Your franchisor should outline how other pre-existing franchisees run their locations and what they expect from yours.

3. Litigation History

Part of the federal law regarding franchises requires that your franchisor disclose their current or previous legal disputes. Potential franchise location owners can use these details to determine whether they want to move forward.

4. Territory Allowances

A franchise typically allots specific territory allowances to its franchisees. That means you can operate and advertise your franchise within a particular area outlined by your franchise disclosure document.

What To Look For in a Franchise Agreement

Now, the Franchise Disclosure Document should explore the risks and benefits that come with this business opportunity and should substantially comply with the Federal Franchise Rule. It comes before the franchise agreement. What should your franchisor include in this agreement?

• Your franchise or private right to operate or expand: Can you expand your territory and operational abilities as you grow your franchise location?
• Specific payment requirements: When does your franchisor expect payments? How much will they cost?
• Pricing allowances: What pricing structures must you follow to profit and pay your franchisor? Do you have wiggle room while sticking to Arizona franchise law?
• Grounds for lawful termination or renewal: What happens if you breach your franchise agreement? How do you secure a contract renewal?
• Dispute management: How does the franchisor mitigate disputes?

You might also sign an ancillary agreement in addition to the initial franchise purchase agreement which outlines other, more specific terms for business operations.

What Role Does a Franchise Lawyer Play?

Some franchisees make the mistake of navigating a newfound business opportunity by themselves. However, even if your contracts seem easy to understand and ironclad, you should consult with an Arizona franchise lawyer to ensure you know:

• Whether the Franchise Disclosure Document and contractual agreements follow the Federal Franchise Rule and Arizona’s business opportunity laws
• How the proposed law from the Arizona House of Representatives might affect your franchise in the future
• The details of each private right outlined in your contract
• The whole picture surrounding any permanent injunctions your franchisor must follow

Even though Arizona is a business opportunity state rather than a franchise registration state, it still has unique strictures that you and your franchisor must honor to operate legally.

Consult Anthony Law Group To Ensure Your Agreement Aligns With Arizona Franchise Law

Ask Anthony Law Group to review your Franchise Disclosure Document and franchise agreement to ensure the franchisor follows all lawful requirements imposed by state and federal governments. Our legal team has extensive experience in Arizona franchise law and helping businesses grow through corporate law solutions. Set up a consultation at (602)-362-2396.