Franchising can be one of the most powerful ways for a business to scale, but it also comes with legal complexities that can overwhelm even the most ambitious entrepreneurs. Few people understand this landscape better than Stuti Murarka, a transactional business attorney at Cheng Cohen LLC, one of the nation’s leading franchise law firms. With more than a decade of experience spanning India and the United States, Stuti has built her career advising franchisors on how to expand while staying legally sound.
Drawing on her background in corporate law, mergers and acquisitions, and franchise law, Stuti has guided clients through everything from structuring deals to navigating regulatory hurdles. The conversation began with discussing her thoughts on the legal steps a startup should prioritize before deciding to expand through franchising.
What are the most important legal steps a startup should take before deciding to expand through franchising?
The decision to franchise is a strategic pivot that requires more than just enthusiasm about growth; it demands legal and operational readiness. First and foremost, a startup should ensure that it has a solid proof of concept. Franchising magnifies both the strengths and the weaknesses of a brand. You want to be absolutely confident that your model is replicable, profitable, and scalable in different markets.
From a legal standpoint, this means developing a strong operational foundation: protect your intellectual property, have your trademarks registered or in process, and formalize all standard operating procedures. Next, prepare a compelling franchise offering that answers a critical question: Why you? In a crowded marketplace, your brand must differentiate itself and not just to consumers but to potential franchisees. That differentiation should be clear in your franchise disclosure document and supported by strong legal documentation like a well-drafted franchise agreement that anticipates the real-world challenges of franchising.
When reviewing a Franchise Disclosure Document (FDD), what red flags should potential franchisees be especially mindful of?
Reading the entire FDD thoroughly is crucial, but some items of the FDD are critical. The first major red flag is lack of transparency in Item 19, which covers financial performance representations. If the franchisor chooses not to provide earnings claims, ask why. You’re being asked to invest significant capital, and therefore, you deserve to see data that supports the business case.
Another area to scrutinize is Item 3, which details litigation history. Repeated lawsuits involving franchisees, especially around misrepresentation or termination, are a serious concern.
Similarly, Item 20, which shows system growth and closures, can tell a compelling story. A high number of terminations or transfers may indicate instability or dissatisfaction in the system.
Also, pay attention to territorial rights, or lack thereof, in Item 12. The franchisor’s right to open competing outlets could in some instances quickly erode the value of your investment.
How have franchising laws or compliance requirements shifted in the wake of the pandemic, and what new risks should entrepreneurs be aware of?
While the pandemic didn’t directly change franchise laws, it significantly influenced how those laws are applied and scrutinized by regulators. There has been a noticeable increase in examiner focus on Item 19, where franchisors disclose financial performance representations, and Item 20, which tracks outlet openings and closures. Data accuracy and context have become more important than ever, especially when past performance may not reflect post-pandemic realities.
From the franchisor’s perspective, one of the most significant shifts has been the increased emphasis on system resilience and supply chain continuity. Franchisors are now expected to clearly articulate how they support franchisees during disruptions, whether through operational flexibility, revised protocols, or temporary relief measures.
We’re also seeing greater legal attention to force majeure clauses, fee deferral provisions, and the franchisor’s broader obligations during periods of uncertainty. For entrepreneurs, a key emerging risk is the temptation to overpromise profitability or system support in times of volatility. Transparency in the FDD and throughout the franchise sales process is not just best practice, it’s essential. The legal environment is increasingly litigious, and even unintentional misstatements can lead to serious consequences.
What are the key legal differences between scaling through corporate-owned units, single-unit franchising, and area development agreements?
Each growth model carries distinct legal implications, and it’s important for businesses to understand what they’re committing to before choosing a path.
When expanding through corporate-owned units, the company retains complete control over operations, branding, and revenue, but it also assumes the full financial and legal burden. This includes direct responsibility for compliance with employment laws, lease agreements, and all local, state, and federal regulations. While this model offers maximum control, it requires significant capital and infrastructure.
In contrast, single-unit franchising creates a legal relationship governed primarily by the franchise agreement between the franchisor and the franchisee. This model allows for more capital-efficient growth, but demands a strong compliance infrastructure. The franchisor must ensure the franchisee adheres to brand standards while providing adequate training and support.
Area development agreements introduce additional complexity. In this model, a developer commits to opening multiple units within a defined territory over a set timeframe. This involves two layers of legal documentation: the franchise agreement for each unit and an area development agreement outlining the development schedule, territorial rights, minimum performance milestones, and consequences for non-compliance.
While area development can accelerate expansion, it also introduces risks for the franchisor. The developer may fall behind on their schedule, leaving prime territory underutilized. Moreover, granting exclusive development rights can give a single franchisee group outsized influence within the system, which may potentially limit the franchisor’s flexibility to pivot or introduce new partners in that market.
Ultimately, the choice of model must align with the brand’s resources, risk tolerance, and long-term strategic goals, and each requires tailored legal planning to mitigate exposure.
How do intellectual property protections, like trademarks and proprietary systems, play a role in safeguarding a franchise brand’s value?
Intellectual property is the backbone of any franchise system. What a franchisor is really licensing is not just a business concept, but a brand identity and a proven system for delivering goods or services. Protecting that intellectual property is critical to maintaining consistency, market credibility, and legal enforceability across the system.
For example, trademarks ensure that franchisees can lawfully use the brand’s name, logo, and slogans without confusion or infringement. But beyond the visible brand elements, proprietary systems, such as operational manuals, technology platforms, operations, and customer service protocols, are equally vital. These are often protected through confidentiality provisions, restrictive covenants, and, where possible, copyrights or trade secret laws.
Without strong IP protection, a franchisor risks not only legal challenges but brand dilution, which can affect the entire system. That’s why part of franchise compliance involves ensuring that franchisees use the IP properly, and that franchisors actively enforce their rights when misuse occurs.
With the rise of digital platforms and AI-driven business tools, what new legal considerations are emerging for franchisors and franchisees?
For franchisors, one key area is data privacy and cybersecurity. As more franchisees use digital tools to collect customer data, franchisors must ensure that there are strict protocols for compliance with privacy laws. Franchise agreements now increasingly include detailed provisions on data handling, breach response, and platform usage.
With using AI for franchise marketing, the issue is whether the AI tool qualifies as a “franchise seller” and therefore must be registered with certain state authorities.
There’s also the matter of platform control. Many franchisors now mandate the use of centralized systems for POS, CRM, or social media. This helps protect brand consistency, but it also means the franchisor must be cautious about joint liability, particularly when it comes to consumer-facing actions or employee management.
Ultimately, as digital and AI tools become embedded in franchise operations, legal frameworks must evolve to address not just compliance, but ownership, accountability, and risk allocation.
Looking ahead, what common mistakes do you see entrepreneurs make when scaling through franchising, and how can they avoid them from a legal perspective?
One of the most common mistakes entrepreneurs make is franchising before the business model is truly ready to be replicated. A concept that works well in one location doesn’t automatically translate to franchise success.
We also see brands making the mistake of not protecting their intellectual property early enough. Trademarks should be filed and secured in key jurisdictions before franchising begins.
Finally, many emerging franchisors rely on generic or poorly tailored franchise agreements. Franchising is not a one-size-fits-all model. Using templates that don’t reflect the nuances of your business or failing to update your agreements as your system evolves can lead to legal exposure down the line.
Another frequent misstep is underestimating the importance of a strong compliance infrastructure. Franchising is a highly regulated space. Entrepreneurs often focus on growth and sales, but neglect the operational and legal oversight needed to monitor franchisee performance, enforce brand standards, and maintain consistency across the system. Without proper legal guardrails such as clear agreements, audit rights, and dispute resolution mechanism issues can quickly escalate.
To avoid these pitfalls, entrepreneurs should take a deliberate approach: validate the business model, invest in experienced franchise counsel, and treat the legal framework as a foundation for sustainable growth.
