Cracking The Code: What Franchisors and Franchisees Need To Know About AI 

There are countless opinions about artificial intelligence (AI) and how it will influence our lives and businesses. Franchising is already being impacted – from automating mundane administrative tasks to trendy content creation on social media. 

Though there are benefits, misuse and over-reliance may pose significant risks for franchisors, franchisees and even NY franchise lawyers. Let’s discuss how AI can positively and negatively impact franchisors and franchisees. 

Understanding Generative AI

Generative AI encompasses artificial intelligence language programs that leverage existing data, such as text or images, to quickly generate new content. This form of AI specializes in efficiently producing original outputs, including images, videos, texts, or podcasts, by utilizing existing information.

Generative AI’s ability to create new content does not suggest it is capable of performing all tasks independently. For instance, it cannot complete a high school student’s book report without human assistance. The same is true for drafting or reviewing crucial franchise documents, such as a Franchise Disclosure Document (FDD) or franchise agreement

AI’s Shortcomings In Franchising

Several franchisors and franchisees have approached me with different ideas and methods for using AI, all to save time, effort and resources. I generally caution against going all-in or being too reliant on any emerging technology in its early stages. It’s just too risky.

For example, franchise stakeholders may attempt to trim costs of a new transaction by pasting the text of prior FDDs into an AI platform to create an FDD for the franchise system. This is not an effective way to streamline the process and operates under the false assumption that NY franchise lawyers employ a cookie-cutter mentality when it comes to drafting FDDs. Similarly, while AI may be able to synthesize the information contained in an FDD to provide prospective franchisees with a more straightforward description of the information contained therein, it cannot provide them with an understanding and context for those terms.

Why Franchisees and Franchisors Still Need NY Franchise Lawyers

Despite the many similarities in franchising, no two transactions or relationships are identical. An AI-generated FDD will not always reflect the intricacies of a franchisor’s design for the franchise system. 

A NY franchise lawyer will have this unique insight, and take the hours to thoroughly draft the FDD to reflect the franchisor’s vision and, leaning on years of experience in franchising, provide for the specific standards that apply to that franchise system.

And since it lacks the depth of human creativity, emotion, and contextual understanding, AI cannot help a prospective franchisee determine what issues are most concerning about the acquisition. 

Franchising depends on relationships – between franchisors and franchisees and between each party and their lawyer. By developing a relationship with your NY franchise lawyer, you can ensure that your needs are addressed, whether you are developing a franchise system or acquiring rights to develop franchises, your lawyer can help you with:

Furthermore, the legality of using AI to generate contracts or agreements (or to review them and provide legal guidance with respect to those agreements) is still unclear. For example, ethical concerns about loss of the attorney-client privilege arising from a lawyer’s use of AI are being debated among bar associations and lawmakers. By contrast, having a trusted relationship with your NY franchise lawyer will ensure that you can discuss all of the issues associated with franchising without fear of a loss of the confidentiality of those discussions.  

Moreover, an FDD drafted by a qualified NY franchise lawyer will have been thoroughly vetted and tailored to the franchisor’s vision for the franchise system and relationship. Similarly, a qualified NY franchise lawyer can bring years of experience to deciphering the terms of the franchise agreement to ensure that prospective franchisees understand what may happen down the road in their franchise relationship.

Looking Ahead

AI should be used to help inspire better ideas, and anyone can use its tools to synthesize the information of a contract to make it more digestible. But putting all your faith in AI can be a costly mistake. Consulting a NY franchise lawyer to draft and/or review your FDD will be time and resources well-spent. 

Lusthaus Law will continue to observe how AI may impact franchisees, franchisors and the franchising industry. Visit our recent Insights installment exploring AI-based technology that could signal major innovations in restaurant takeout.

Contact Lusthaus Law

Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation.

Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.


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