Franchises

A franchise is an agreement by which the franchise business (the franchisor) licenses the business operator (the franchisee) to operate a business under the name of the franchisor. The franchisee is authorized to use and market goods or services under the franchisor's trademarks, service marks and trade names, for a specific length of time.

The logic in buying a franchise is usually that there is significant value in the goodwill and other rights associated with the franchised business model that has previously been developed and operated successfully by the franchisor. This may or may not be the case in a given situation.

Generally, the franchisee will pay an up-front fee as well as continuing fees based on the dollar amount of goods or services sold. The franchisor offers services such as training the franchisee and providing market research to determine a favorable location for the business. The franchisor typically has strict rules and standards as to how business is conducted, the goods and services to be sold and the design and construction of the business location.

Lenders may be more willing to finance the franchisee of a reputable and established franchisor than the entrepreneur desiring to open an unproven business. Although by no means free from risk, a franchise from a franchisor with well-known and well-accepted products or services can significantly reduce business risks and enable you to own and operate a business on your own with no previous training.

If you're considering franchising, you'll want to carefully investigate:

• The specific costs
• Whether financing is available
• What your expected earnings might be
• How long the franchise agreement runs

A franchise business must follow both federal and state regulations adopted to guard against abuses in the franchisor-franchisee relationship.

At the federal level, franchising is regulated by the Federal Trade Commission ("FTC"), which requires franchisors to give an extensive disclosure document to prospective franchisees so that they can evaluate the financial and business risks associated with the business to be operated.

The FTC disclosure document - called a "UFOC" - covers 23 areas of specific legal and financial information needed to determine the experience and financial strength of the franchisor. If the franchisor makes representations about the income a prospective franchisee can expect to earn, the disclosure document may also be required to provide information regarding the financial results other franchisees have experienced.

The FTC also requires franchisors to provide copies of all proposed franchise agreements when first meeting with a potential franchisee, at least ten days before a binding agreement is signed, or at least ten days before the franchisor receives any payment from the franchisee, whichever occurs earliest.

Currently, there are state-specific franchise laws in:

• California
• Florida
• Hawaii
• Illinois
• Indiana
• Maryland
• Michigan
• Minnesota
• New York
• North Dakota
• Rhode Island
• South Dakota
• Texas
• Utah
• Virginia
• Washington
• Wisconsin

These franchise laws attempt to level the playing field between franchisor and franchisee in order to prevent the abuses that can arise in the franchise relationship and to establish certain minimum rights of the parties.

Well-established and successful franchisors are usually unwilling to make significant changes to their standard franchise documents. Less established franchisors, needing to expand their business base, might be somewhat more flexible. In setting up a franchised business, third parties, such as landlords and lenders, may also be involved.

Because of the complexity and length of the franchise agreements and the added complexity of third-party arrangements, you should consult with a franchising attorney and accountant early in the process of considering or negotiating a franchise agreement.

Sherrie Bennett is the former director and staff attorney at the University of Washington Student Legal Services in Seattle.

Related Web Links:

FAQs On Buying A Franchise
Florida Franchise Law

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