Franchise businesses are businesses structured with a franchisor who licenses specific trademarks and methods of doing business to a franchisee in exchange for recurring payments in the form of franchise fees.
The franchisee and franchisor would typically enter into a franchise agreement, which binds the parties together through contractual provisions and defines the terms of the agreement.
In short, franchising is an arrangement whereby someone with an existing business or business idea (the franchisor), sells to another person (the franchisee) the rights to use the business's name, sell a product, or provide a service to someone else. The terms of the sale are defined in a franchise agreement which will usually define a specified territory that the franchisee would operate in. The franchise agreement would also specify the extent to the franchisor would support the franchisees business activities in the form of intitial and ongoing training, information systems, business practices, and sales and marketing campaigns. Many franchise agreements today do not provide the franchisee with an exclusive territory and is something that should be taken into consideration when selecting the right franchise.
Franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators).
Franchising also allows franchisors to expand their brand very rapidly across countries and continents, and can reap enormous profits in the process by leveraging their pool of franchisees who manage the customer relationships while paying their own business expenses. Additionally, the franchisor is able to build a captive distribution network, with little or no financial commitment.
Franchise establishments also provide a sense of desired consistancy for many consumers. Most people know exactly what to expect when they walk in to a MacDonalds (for example), regardless of what the location or who the owner is.
For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, and marketing, the franchisee is required to follow the system and get approval of changes with the franchisor.
Another problem is that the franchisor/franchisee relationship can easily give rise to litigation if either side is incompetent (or just not acting in good faith). For example, an incompetent franchisee can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services, and an incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits.
Because litigation is expensive, the majority of franchisors have inserted mandatory arbitration clauses into their agreements with their franchisees. Since 1980, the U.S. Supreme Court has dealt with cases involving direct franchisor/franchisee conflicts at least three times, and two of those cases involved a franchisee who was resisting the franchisor's motion to compel arbitration. Both of the latter cases involved large, well-known restaurant chains (Burger King and Subway).
In the United States, franchising falls under the jurisdiction of a number of state and federal laws. Franchisors are required by the Federal Trade Commission to have a Uniform Franchise Offering Circular "UFOC" to disclose potential franchisees about their purchase. This disclosure must take place ten days prior to solicitation. Each state may require the UFOC to contain specific requirements. This means that many franchisors have a unique UFOC for each state or sometimes are able to include all state specific requirements into one document.
If you are considering buying a franchise or are an existing franchisor or franchisee needing help with franchise related legal issues, you can get quick and easy access to Franchise Lawyers in your area offering sound legal help and assistance for simply by completing the form at the top of this page.