WHAT IS A FRANCHISE?
A franchise is a business relationship in which an owner (the franchisor) licenses others (the franchisees) to operate outlets using business concepts, property, trademarks and tradenames owned by the franchisor. Your local McDonald's is probably operated as a franchise. Franchise relationships are regulated by each state and by the Federal Trade Commission and are often quite complex.
A contract known as a franchise agreement should spell out the details of each particular venture. The franchisor often provides the initial capital for the franchise and, in turn, typically takes in a larger share of future profits. In addition,
A franchisor usually provides:
The franchisee provides:
- a proven business concept
- name recognition
- business know-how
- advertising support.
The franchisor and the franchisee both share in the risks and returns of the business, although each agreement is structured differently. Typically, the franchisee is his or her own boss on a daily basis. The franchisor also has a say in the business. For instance, the franchisor is usually responsible for quality control and for maintaining a uniform image among all franchisees. If the quality is not up to par, the franchisor may direct the franchisee to make changes.
- supplemental capital
- the effort to make the business concept work.
IS A LAWYER NECESSARY? It is highly advisable to consult a lawyer. A franchise agreement is a highly technical business document that can have serious financial consequences. The laws regarding franchising vary from state to state, and you do not want to end up with an invalid agreement or unintended liabilities.
Before entering into a franchise agreement, you should consult a lawyer to be sure that you understand what your responsibilities are. As a potential franchisee, you, along with your lawyer, should:
- thoroughly review the financial disclosure and other documents relating to the franchisor and the business
- understand the franchise fee that you will have to pay and the payment schedule
- review state law requirements, if any, regarding franchise advertising
- familiarize yourself with federal and any state law regulations governing the franchise relationship
- learn about your competition and the legal issues dealing with the handling of competitive activities.
Before signing the franchise agreement, you should know what it says regarding certain key issues, including:
- your right to have the only franchise within a certain territory
- its term, termination and renewal
- any limitations on your right to sell the franchise
- costs and procedures for terminating the agreement
- any restrictions on your right to operate a competing business when the franchise agreement terminates
- your liability, if any, if the franchise does not make its projected profits.