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Factors to Consider Before Buying a Franchise in New Jersey

If you are considering the purchase of a franchise in the State of New Jersey there are a number of legal factors that you must consider and discuss with your franchisor lawyer prior to signing a franchise agreement or paying a franchise fee. Franchised businesses, including restaurants, computer repair services, cost recovery services, car washes and gas stations, represent a significant number of the successful businesses in the State of New Jersey. Franchise relationships are extensively regulated and as a prospective franchisee you must be aware of the legal rights and obligations that you are about to undertake.

Factors to Consider

Before buying a franchise and paying any franchise fee or signing any franchise agreement it is important that you be aware of the following information:

The Franchisor's "Franchise Disclosure Document" ("FDD") Is An Important Tool That Must Be Evaluated

In the state of New Jersey and each and every state throughout the United Stated the Federal Franchise Rule requires that a franchisor must provide you with its FDD at least 14 days prior to you signing a franchise agreement or paying any money to the franchisor.

As a prospective franchisee and purchaser of a franchise the FDD is a critical tool that contains information about your franchise investment and the legal rights that you are about to undertake and obtain. The FDD includes a copy of the franchise agreement that you will be required to sign and contains various disclosures about the franchisor, the franchisor's management, the protected territory that you may or may not be granted and numerous other factors that will affect the day to day operations of your business. The FDD should not be overlooked or disregarded and, if evaluated properly, will provide you with important insight and information. Even if you are certain that you are going to proceed with the purchase of a particular franchise, a review of the FDD with an experienced franchise lawyer will alert you to factors and information that, if unacceptable, may be modified in an addendum to your franchise agreement.

Changes Can be Made to Your Franchise Agreement

Although many franchise opportunities are presented as "non-negotiable", typically, this is not the case. That is, if approached properly, your franchise lawyer may be able to implement a number of substantive changes to your franchise agreement respecting your rights as a franchisee. Keep in mind that franchise agreements are drafted by the franchisor and, typically, are one-sided in favor of the franchisor.

As a franchisee, your franchise agreement may require modification respecting your substantive rights as a franchisee. These rights typically address and involve issues such as:

  1. The "protected territory" that you will be granted;
  2. Whether or not you may obtain a "right of first refusal" respecting the opening of additional franchise units located within a close proximity to your protected territory;
  3. Your ability to transfer your franchise to family members without paying a penalty or assignment fee;
  4. The "royalties" and "advertising fund fees" that you may be required to pay;
  5. Whether or not the franchisor has the ability, in the future, to implement a costly "regional advertising cooperative" that you may be required to contribute to;
  6. Your ability to transfer and sell your franchise in the future; and
  7. The "restrictive covenants" contained in the franchise agreement that may limit your ability to open or work in a different business even if your franchise agreement is terminated.

The "New Jersey Franchise Practices Act"

Although New Jersey is not a "franchise registration state", New Jersey has nevertheless implement legislation designed to supplement and improve the rights of franchisees. Among other things, the NJFPA implements specific provisions designed to protect franchisees from the arbitrary termination or non-renewal of their franchise. When negotiating the terms of your franchise agreement, knowledge of the rights and protections afforded by the New Jersey Franchise Practices Act is an important tool. Discuss the protections afforded by the NJFPA with your franchise lawyer.

Charles Internicola

by Charles Internicola
National Business and Franchise Lawyer

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