How to Structure a Franchise -The Role of the Franchise Attorney

Introduction

Here I explain the reasons why you should hire an attorney and consultant when developing your franchise business. This brings us to the first question you may have: “If there is no ‘Franchise Law’ in Puerto Rico, why do I need a franchise attorney?”

The Legal Landscape

Yes, there are laws that affect franchises. Franchise contracts in Puerto Rico are not specifically regulated, but they are legally accepted and governed by contract law and federal laws and regulations. Additionally, there is Law No. 75-1964, which focuses on regulating the termination or non-renewal of a distribution contract without just cause. Although the law focuses on the distributor, it has been used to assess the termination of a franchise business relationship. See Franquicias Martins BBQ v. Luis García de Gracia, 2010 TSPR 71.

Judicial Precedents

According to jurisprudence in Puerto Rico, the existing relationship between franchisor and franchisee is one of independent entrepreneurs governed by a commercial franchise contract that establishes the rights and obligations between the parties. This implies that, regardless of a specific law regulating a franchise-type commercial structure, complex rules must be established.

Do It Yourself or Seek an Advisor

Perhaps due to the lack of regulation, many entrepreneurs believe they can structure the franchise on their own. They try to obtain franchise contracts and other related documents using canned templates obtained for free or at a low cost on the internet, thus avoiding a consultant and/or attorney. Below we discuss the limitations of these pre-packaged solutions.

Role of the Franchise Attorney

The franchise attorney works with you to develop the legal structure and corresponding documents necessary to franchise your business and comply with federal regulations. This includes defining relationships between the franchisor, franchisee, and third parties involved, such as suppliers and allies. All of this varies depending on the franchise’s business model and cannot be properly completed by filling in blanks on a canned form. While you may not have issues initially, conflicts between franchisors and franchisees do occur and end up in court. The attorney works, among other things, to avoid conflict and protect the franchise structure in case of conflict.

Cutting Corners

Despite these benefits, many entrepreneurs prefer to cut costs on core matters rather than start a good relationship with consultants, lawyers, and accountants, disregarding the importance of structuring a business properly from the beginning. Even knowing that they must offer detailed business disclosure, as per federal regulation, they avoid it and take risks.

Conclusion

In my experience, those who go from office to office seeking free guidance to later do it themselves often find it backfires. Life does not operate on shortcuts, and in the end, it catches up with you. One of the most basic recommendations given to people starting a business is to seek an accountant and a lawyer; but not just any lawyer.

Matters Handled by a Franchise Attorney

A franchise attorney will advise and establish the processes to follow and what documents should be drafted to sign your first franchisee. Legal provisions for franchising a business include those related to the brand, intellectual property, trade secrets, customer data, contract duration, non-compliance, termination, post-termination duties, royalties, payment methods, internal rules, confidentiality, franchise transfer, renewal, termination among others.

If you want more information from a broader perspective check our article:  Navigating-The Complex Landscape of Franchising: An Advisors Perspective