What is Franchise Law?
Franchise Law relates to the business model of franchising. Franchising is a business practice that allows the franchising company to license its business model, intellectual properties (such as logos, trademarks, and patents), and corporate goodwill to another company or individual. The franchise model allows a company to expand quickly and is an alternative to the building of multiple locations all owned by a single person or entity. The single owner, or 'chain store' model, requires significant investment by the owner at both startup and throughout the operation of the satellite locations. Meanwhile, franchising allows the parent company to pass much of the expense of expansion on to the persons or entities who license the business franchise rights.
In franchising, the franchisor (the licensing parent company) licenses the use of its business model to other companies that are allowed to open their own operations using the franchisor's name, trade marks, distribution network, and products/services. The franchisee (the child company that wants to buy into the franchisor's business model) pays a royalty to the franchisor for use of the business model, marks, and name, and is normally granted access to the franchisor's distribution network from which it buys its products. As a result, the franchisor usually acts as not just the originator of the business idea, but also takes on more of a supply role. Meanwhile, the franchisee handles all day-to-day customer interactions.
Franchising allows the franchisor to expand quickly without enormous expenditures of capital. Franchising provides a means to distribute the expense for new locations and operations among the franchisees while the franchisor does not have to sell interests in its company. However, franchising does require the franchisor to relinquish some of its control over its satellite locations.
Culture of Franchising in America
The United States has a long history of franchising, dating back to the 1930's when it first gained popularity among fast-food restaurants, food inns and, motels. As of 2005, there were 909,253 established franchised businesses, generating $880.9 billion of output and accounting for 8.1 percent of all private, non-farm jobs. This amounts to 11 million jobs, and 4.4 percent of all private sector output. Examples of well known franchise-based brands include Subway and McDonald's (restaurants), 7-Eleven (convenience stores), Hampton Inns & Suites (hotels), Great Clips (hair salons), H&R Block (tax preparers), and many more.
Legal Issues Related to Franchising
Each party to a franchise has several legal interests to protect. The franchisor is involved in securing protection for the trademark, controlling the business concept, and securing the know-how of its business model. It must consider the legalities of its distribution and shipping models, the tax implications of its franchising system, the contract terms to enforce its rights, and the potential for pass-through liability it may experience as a result of the actions or inactions of its franchisees.
The franchisee, on the other hand, is obligated to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization required, and this is usually enforced through strict, carefully worded contracts known as franchising agreements. For example, the franchisee normally has to display the franchisor's signs, logos, and trademark prominently, must adhere to dress policies, must meet certain minimum customer service standards, etc. Failing to do so can result in a breach of the franchising agreement and termination of the right to use the franchisor's model, name, and logos (effectively putting the franchisee out of business). Additionally, the franchisee must handle day-to-day employment issues, procurement of supplies not provided by the franchisor, health code standards, and many others.
If you are looking for more information about franchising, and the legal considerations that come with it, you should review the materials found below. Additionally, should you require the assistance of an attorney to answer your questions, prepare or review your agreements, resolve disputes, or provide any other legal services, you may find an attorney in your area on our Law Firms page.
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Articles About Franchising Law
- The Basics of Franchise Tax Board PenaltiesTax returns with a franchise could lead to severe consequences when the paperwork contains errors or falsifications for yearly income and other expenses or deductions. It is imperative that the owner of the franchise discloses all information and ensures that the Internal Revenue Service has everything with all valid and correct details.
- Substantial Misstatements and Franchise Tax Board PenaltiesThe penalties for mistakes and misstatements in tax documents are costly and may lead to severe consequences for those involved. However, when the misstatements are substantial, they may lead to additional fees or even criminal charges depending on the specific circumstances.
- Planning for Setting Up a Franchise?Many small businesses consider setting up their business as a franchise. There are several advantages to this model, including the ability to bring in an ongoing revenue stream. This increases the core business’ profitability while also rolling out a successful model to other individuals who dream of being an entrepreneur. The core business often provides a model and ongoing support so that an entrepreneur does not have to start from scratch. Some tips to help lead to a successful franchise include:
- What Are the Benefits of Franchising a Business?Purchasing a franchise over launching a new business has many benefits, but there are some drawbacks as well. For the person considering this option, he or she should research these matters fully before initiates the purchase with the franchisor and know what the entire situation will entail.
- What Are the Benefits and Drawbacks of Franchising a Business?When considering buying or building a business, many individuals may feel the better option is through a franchise. However, while there are certain benefits of following through this this action, there are also drawbacks that the potential business owner needs to understand before committing to franchise business.
- Three Deal-Breakers in Franchise AgreementsA franchise may be the perfect way for budding entrepreneurs with little capital and/or little experience in operating a business to get started with their own business.
- Legal Considerations when Purchasing a FranchiseWhen considering launching a business project, someone may decide to purchase a franchise. However, it is important to understand the legal considerations that must be taken into account when buying a franchise from a larger company.
- Florida Franchise Law: Do I Want to Be Part of a Franchise?There are a number of good reasons to be part of a franchise relationship. For prospective franchisees (the person buying on a franchise), one initial consideration may be the minimization of start-up costs. In exchange for upfront payments and/or monthly fees, the franchisor provides a ready-made business foundation.
- Considering Purchasing a Franchise in California?Get Your Franchise Lawyer Involved Early.
- Rights in a California Franchise DisputeMany small business owners choose to open a franchise for various reasons. Franchise arrangements allow a new, inexperienced business owner to experience some of the benefits of small business ownership without having to completely “go it alone.”
Franchising Law - US
- ABA - Forum on Franchising
The Mission of the Forum on Franchising is to be the preeminent forum for the study and discussion of the legal aspects of franchising.
- ABA - International Franchise and Distribution Division
The Forum's International Division provides an opportunity for education, networking and the exchange of ideas among franchise lawyers from around the world. This year's Division breakfast program will focus on the localization of franchise systems.
- Amended Franchise Rule
The following questions recently have been asked about the amended Franchise Rule. These questions will be addressed in the forthcoming Compliance Guide. Additional questions and responses will be posted periodically in order to assist franchisors in their review of the amended Rule requirements.
- Franchise and Business Opportunities Rule
The Federal Trade Commision has a large code of regualtions that is known as the franchise rule. A section of this rule requires the franchisor to provide a disclosure statement to the potential franchisee. This statement is called a Uniform Franchise Offering Circular (UFOC).
- Franchise Disclosure Document (FDD)
UFOCs.com is the definitive source of current and historical FDDs/UFOCs and Item 19s. Over 20,000 FDDs/UFOCs are available from an extensive library that dates back to 1990. Roughly 3,000 individual franchise concepts are listed in our FDD/UFOC Store. Whether you need a company's entire FDD/UFOC, including Franchise Agreement, or an individual FDD/UFOC item, we can meet your needs in an efficient and cost-effective manner.
- Franchise Registration and Disclosure Guidelines
Uniform Franchise Offering Circular (UFOC) Guidelines were prepared and adopted by the North American Securities Administrators Association (NASAA) and its predecessor, the Midwest Securities Commissioners Association. Although NASAA cannot create statutes (that is the constitutional province of state legislatures), NASAA intends for the UFOC Guidelines to facilitate compliance with disclosure requirements under state franchise investment laws.
- Franchising - Definition
Franchising is the practice of using another firm's successful business model. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.
- FTC - Filing a Complaint Against a Company - Franchising
The Federal Trade Commission, the nation's consumer protection agency, collects complaints about companies, business practices, identity theft, and episodes of violence in the media.
- State Offices Administering Franchise Disclosure Laws
Fifteen states have franchise investment laws that require franchisors to provide pre-sale disclosures, known as "offering circulars," to potential purchasers. Thirteen of these state laws treat the sale of a franchise like the sale of a security. They typically prohibit the offer or sale of a franchise within their state until a franchise offering circular has been filed on the public record with, and registered by, a designated state agency.
Organizations Related to Franchising Law
FranchiseHelp.com is the only one-stop global address for almost everything in franchising. Operating since 1996, FranchiseHelp will assist you in a professional, cost effective way to reach your franchise objective.
For 20 years, FRANdata has been focusing exclusively on franchising activity in every industry in every company. We work with franchisors to benchmark and improve their performance; with franchisees, to help them assess opportunities, and with suppliers of all kinds to market to and provide services for every franchise company. If your business is in franchising or selling to franchise businesses,
- International Franchise Association
The International Franchise Association, founded in 1960, is a membership organization of franchisors, franchisees, and suppliers. Our Web site is dedicated to providing our members and guests with a one-stop shopping experience for franchise information.
- North American Securities Administrators Association (NASAA)
In the United States, NASAA is the voice of state securities agencies responsible for efficient capital formation and grass-roots investor protection. Their fundamental mission is protecting consumers who purchase securities or investment advice, and their jurisdiction extends to a wide variety of issuers and intermediaries who offer and sell securities to the public.
- Open Franchise Foundation
The Open Franchise Foundation is a 501(c)(3) organization formed to promote the unfettered access to franchising related documents, such as the UFOC and FDD. It is entirely funded by the generous support of our founding benefactors and franchising community members. Together we advocate franchise openness and equal access to information.
- World Franchise Council
The World Franchise Council is as an amicable and a non political association of National Franchise Association which was established by decision of a meeting of National franchise Association Executives held on Monday, February 14th, 1994 under the auspices of the International Franchise Association (IFA) and supported by the European Franchise Federation during IFA 1994 Convention in Las Vegas. That meeting considered a draft constitution produced following the first International franchise summit held on December 1st, 1993 under the auspices of the Mexican Franchise Association.
Publications Related to Franchising Law
- Buying a Franchise: A Consumer Guide
When you buy a franchise, you often can sell goods and services that have instant name recognition, and get training and support that can help you succeed. But purchasing a franchise is like every other investment: there’s no guarantee of success. The Federal Trade Commission, the nation’s consumer protection agency, has prepared this booklet to explain how to shop for a franchise opportunity, the obligations of a franchise owner, and questions to ask before you invest.
- FTC - Franchise and Business Opportunity FAQ's
The five most frequently asked questions about franchise and business opportunities are: 1. Where can I get a company's pre-sale disclosure document? 2. How can I find out about complaints against a company? 3. How can I file a complaint against a company? 4. How do I know what must be included in a franchise disclosure document? 5. How can I find a lawyer who specializes in franchising?