Know Your Role: Restaurant Franchises and State Licensing Requirements

Purchasing a franchise can be a profitable opportunity for many entrepreneurs, as franchise systems offer a valuable support system that can help protect your investment. The franchise system ("franchisor") will generally provide substantial development, training, marketing, and management assistance. However, restaurants in Florida must hold the appropriate state food service and alcoholic beverage licensees in order to operate, and that process is likely to be the responsibility of the franchise purchaser ("franchisee").

The respective obligations of the franchisee and franchisor are laid out in the franchise agreement and franchise disclosure document, and different franchise systems handle the important state licensing piece differently. If you are opening a restaurant in Florida, you will need to obtain a food service license from the Division of Hotels and Restaurants prior to opening. There is an inspection process, and, depending on the site that you have chosen, you may be required to submit your site plan for state review. If you are serving alcohol, you will need to qualify for one of the beverage licenses issued by the Division of Alcoholic Beverages and Tobacco. Understanding the licensing process is important, especially if you are planning to open within a tight time frame.

For context, the franchisor is only obligated to provide the support and services outlined in the signed franchise agreement. The franchise agreement is a pivotal component of the franchising process, and will govern your relationship with the franchise system moving forward. It is critical that you carefully review the agreement prior to signing, and many franchisees engage an attorney to provide assistance during this phase. I strongly advise clients to conduct substantial due diligence prior to making a decision. Potential franchisees should closely review the documents and meet with current franchisees to discuss the realities of owning a franchise, including the actual level of support and competence of the franchisor. Many franchise or hospitality lawyers, including this one, are able to help you through the pre-purchase process.

Franchisors have an interest in their franchise locations opening on schedule, and may offer some level of licensing assistance. However, it is common for all licensing and permitting activities to be the responsibility of the franchisee, with some agreements establishing that a lack of successful licensure is a material breach of the contract. The franchise agreement may also establish many requirements that are directly or tangentially related to state licensing, including setting minimum insurance requirements, indemnifying the franchisor from alcohol-related claims, requiring safe service training, etc. 

In order to further illustrate the issue, I retrieved and reviewed a publicly-available franchise disclosure document from Broadway Bar & Pizza. Broadway is a Minnesota-based franchise that is competing in the hot fast-casual pizza space, and its disclosure document is crystal clear on licensing and permitting matters. On page two, it states that the franchisee must obtain all of the applicable health permits, inspections, and/or approvals required by municipal, county, or state health departments. Additionally, the document empowers Broadway to terminate the franchise agreement if the franchisee fails to apply for and obtain licenses to serve food and alcohol within a certain time period. In the event of a termination, the franchise will retain $5,000 of your initial franchise fee, or its reasonable administrative and out-of-pocket expenses, whichever is greater. Being unprepared will cost you time and money, under this agreement and many others.

Of course, it would also be inadvisable for a franchisee to spend funds on something that the franchise system was obligated to provide. I am aware of franchise systems that make their licensing and permitting specialists available to their franchisees as a part of the deal. Again, a thorough review of the disclosure document and franchise agreement is required.

The bottom line is that while potential franchisees have a myriad of factors to consider when purchasing a franchise, state licensing requirements must also be a part of the analysis. 

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