LEGAL ISSUES OF FRANCHISING

A healthy franchisor-franchisee relationship is crucial for mutual success.

Given the long-term nature of franchise partnerships, a solid foundation built on clear understanding is essential. Franchising is regulated by laws requiring franchisors to provide detailed information to potential franchisees about the franchise relationship.

Key Legal Documents:

• Franchise Disclosure Document (FDD) / Uniform Franchise Offering Circular (UFOC):

  • Purpose: Mandatory document from the Federal Trade Commission (FTC) that franchisors must give to prospective franchisees.

  • Function: Provides critical details about the franchise opportunity, enabling informed investment decisions.

  • Key Disclosures:

    • Business Description: Franchise business overview, history, founders, and incorporation details.

    • Franchise Fees and Royalties: Initial franchise fee, ongoing royalties, and any advertising fees.

    • Officers and Executives: Summary of key personnel involved in the franchise.

    • Litigation History: Information on significant legal actions (civil, criminal, bankruptcy) involving officers, executives, or the franchise company.

    • Franchise Agreement Terms: Details of the franchise agreement, including term length, renewal options, and termination conditions.

    • Initial Costs & Financial Projections: Estimated startup expenses (equipment, inventory, operating capital, insurance).

    • Termination and Territory: Conditions under which a franchisor can terminate the agreement early.

    • Franchisor’s Responsibilities: Franchisor’s obligations to franchisees (training, site selection, advertising support, ongoing assistance).

• Franchise Agreement:

  • Nature: Legally binding contract between franchisor and franchisee.

  • Content: Defines rights and responsibilities of both parties.

  • Key Areas Covered: Trademark use, territory rights, adherence to standards, ongoing fees, franchisor support.

  • Importance: Ensures consistent treatment of all franchisees within the system. A well-written agreement is vital for clearly setting expectations and responsibilities.

ALTERNATIVES TO FRANCHISING

Besides franchising, businesses use other methods to expand their market and distribution. Two common alternatives are:

• Distributorships

• Licensing

DISTRIBUTORSHIPS

• Distributor Characteristics:

  • Contractual Relationship: Operates under an agreement with the supplier.

  • Bulk Purchase & Resale: Buys in large quantities from the supplier and sells in smaller amounts.

  • Local Market Expertise: Possesses knowledge of local markets and customer preferences.

  • Multi-Supplier Potential: May work with various suppliers, not exclusively one.

  • Limited Support: May receive less contractual support and training compared to franchisees.

Note: Distributorships and franchises can sometimes be similar. A franchisee with significant operational freedom might resemble a distributor. Conversely, a distributor under considerable supplier control may start to resemble a franchise.

LICENSING

• Licensing Basics: Allows a licensee to pay for the right to use a specific trademark or intellectual property.

• Key Difference from Franchising: Licensors are primarily interested in royalty collection and brand usage oversight, not in controlling the licensee’s business operations to the same degree as franchisors in franchising. Operational control is less central in licensing compared to franchising.