Buying a Franchise: The Business Forum Show, March 5, 2014

Buying a franchise business is a bit more complicated than buying your garden variety, run of the mill closely held business.  That’s why Kevin Hunter and I dedicated a separate, standalone segment to the topic of buying a franchise business on the March 5 edition of The Business Forum Show.  To listen to the segment, click here.

Minnesota’s franchise law is one of the more stringent in the U.S. in that the Minnesota Department of Commerce conducts a merit review of the franchise offering materials prior to the franchisor having the right to make offers to prospective franchisees.  Next door in Wisconsin, for example, franchisors are required to file their materials for informational purposes only; no review is conducted.

Franchise Law in Minnesota is governed by Minnesota Statutes Chapter 80C, known as the Minnesota Franchise Act.  Generally speaking, the Act defines a “franchise” as a contract or agreement, either express or implied, whether oral or written, for a definite or indefinite period, between two or more persons, where three elements are present:

(i) a franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchisor’s trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics;

(ii) the franchisor and franchisee have a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise; and

(iii) the franchisee pays, directly or indirectly, a franchise fee.

Minn. Stat. § 80C.01, Subd. 4. 

“Franchise fee” is broadly defined by the Act and means “any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business or to continue a business under a franchise agreement, including, but not limited to, the payment either in lump sum or by installments of an initial capital investment fee, any fee or charges based upon a percentage of gross or net sales whether or not referred to as royalty fees, any payment for goods or services, or any training fees or training school fees or charges.”  Minn. Stat. § 80C.01, Subd. 9. 

Besides the aforementioned registration and review requirements, the most significant aspect of the Act is the protections established to protect the franchisee due to the financial disparity between the franchisor and franchisee (typically the franchisor has greater financial resources than the franchisee) and uneven bargaining power which could lead to problems or potential abuses by the franchisor.  The Act provides for the franchisor to be held civilly liable to the franchisee for any unfair practices engaged in by the franchisor.  Minn. Stat. § 80C.14 Subd. 1.  The franchisor cannot terminate the franchise, fail to renew the franchise, or withhold consent to transfer the franchise without giving written notice 90 days ahead of time addressing the reasons why, and without good cause for doing so.  Good cause is typically adequate when the franchisee has failed to reasonably comply with the franchise agreement between the parties.  Minn. Stat. § 80C.14 Subd. 3.  Any violation of the Minnesota Franchise Agreement results in holding the franchisor civilly liable to the franchisee “for rescission, or other relief as the court may deem appropriate.”  Minn. Stat. § 80C.17 Subd. 1.

As mentioned on the show, while a franchise agreement is almost always non-negotiable, it is a good practice to engage a qualified attorney to review the agreement and advise as to its terms and provisions as part of the due diligence process for purchasing a franchise.

For more information on buying a franchise, the Minnesota Department of Employment and Economic Development (“DEED”) has some excellent materials on its website.