What you must know before entering franchising in New Jersey

New Jersey is a non-registration state, which means that you do not have to file, register or get approval from a state to start franchising your business. Despite this, you gain protections under the New Jersey Franchise Practices Act (NJFPA). As an entrepreneur planning to enter franchising, having a full understanding of your rights and state regulations is important.

Why a franchise relationship is unique

Starting an independent startup or partnership is significantly different from franchise relationships. A franchisor owns the brand and system, while a franchisee owns and operates the physical business asset.

If you are planning to franchise a business, you pay for a system and give up significant independence. Investing your capital and labor to build the brand is part of the process, but you do not have a share in the brand’s intellectual property. This power imbalance aims to protect the franchisor, but the NJFPA sets rules to prevent an unjust relationship.

When franchisee rights protection applies

Gaining protection under the NJFPA may only apply if you meet these franchise legal requirements:

• You conduct business in New Jersey.
• The gross sales between you and the franchisor exceed $35,000 for 12 months.
• You derive more than 20% of your gross sales from the franchise.

Satisfying these means you are safe from unfair practices of a franchisor. Under the NJFPA, a franchisor cannot cancel your contract without proper notice. They also cannot prevent you from joining a franchisee association. Additionally, franchisors cannot force you to sign a contract that waives your rights under state law.

What you should watch out for in agreements

Conducting a franchise agreement review in New Jersey before signing is crucial. This document heavily favors the brand owner, and signing without evaluation risks you of losing capital. Be wary of high-risk clauses that include:

• Ambiguous Territory: Terms that allow a brand to open business near you

• Undisclosed upgrades: Statements that do not define any operational changes that may occur mid-contract

• Defined vendors: Provisions that give the franchisor full control over vendors to buy inventory, ingredients, packaging and software from

• Vague marketing funds: Clauses that grant the franchisor the right to increase your contributions on advertising

• Exit penalties: Conditions about fining you with costly penalties should you choose to close early.

Scrutinizing franchising agreements for red flags can be difficult due to legal jargon. Even if you may have experience in navigating contracts, a misunderstanding can result in a partnership that risks your livelihood.

Begin franchising with caution and legal guidance

Franchising can be lucrative, but you must be careful of what you sign. If a franchisor offers their terms, make sure to review it and negotiate your protections. You have the power to ask for larger protected territory to prevent internal competition or set expectations on operational upgrades. Additionally, define the steps for franchise dispute resolution when conflict arises.

You can also ask a business attorney to review the agreement. They can break down the terms, explain them to you in simple language and offer insights into making the franchise relationship work for you.