Franchising

What is Franchising?

There are many definitions of Franchising but in essence involves the granting of rights by a company, the franchisor, to a third party, the franchisee, to operate their business system using a common brand and format for promoting, managing and administering the business.


 

• 1Franchising
  • 1.1Legal Aspects
    • 1.1.1United States
    • 1.1.2United Kingdom
    • 1.1.3Other Countries
  • 1.2Helpful Tips
  • 1.3Franchise Agreement
  • 1.4Other Resources
• 2Small business
• 3Starting a business

[top]Legal Aspects

[top]United States

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 provide a Uniform Franchise Offering Circular (UFOC) to disclose essential information to potential franchisees about their purchase. States may require the UFOC to contain specific requirements but the requirements in the State disclosure documents must be in compliance with the Federal Rule that governs federal regulatory policy. There is no private right of action under the FTC Rule for franchisor violation of the rule but fifteen or more of the States have passed statutes that provide a private right of action to franchisees when fraud can be proved under these special statutes.

The franchise agreement is a standard part of franchising. It is the essential contract signed by the franchisee and the franchisor that formalizes and specifies the terms of the business arrangement, as well as many issues discussed in less detail in the UFOC. Unlike the UFOC, the franchise agreement is a fluid document, crafted to meet the specific needs of the franchise, with each having its own set of standards and requirements. But much like a lease, there are elements commonly found in every agreement. "There is a difference between a discrete contract and a relational contract, and franchise contracts are a distinct subset of relational contracts." Franchise contracts form a unique and ongoing relationship berween the parties. "Unlike a traditional contract, franchise contracts establish a relationship where the stronger party can unilaterally alter the fundamental nature of the obligations of the weaker party......."

There is no federal registry of franchises or any federal filing requirements for information. States are the primary collectors of data on franchising companies, and enforce laws and regulations regarding their presence and their spread in their jurisdictions. In response to the soaring popularity of franchising, an increasing number of communities are taking steps to limit these chain businesses and reduce displacement of independent businesses through limits on "formula businesses."
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 four times, and three of those cases involved a franchisee who was resisting the franchisor's motion to compel arbitration. Two of the latter cases involved large, well-known restaurant chains (Burger King in Burger King v. Rudzewicz and Subway in 517 US 681 (1996) Doctor's Associates, Inc. v. Casarotto); the third involved Southland Corporation, the parent company of 7-Eleven in Southland Corp. v. Keating, 465 US 1 (1984) .

[top]United Kingdom

In the United Kingdom, there are no franchise-specific laws; franchises are subject to the same laws that govern other businesses. For example, franchise agreements are produced under regular contract law and do not have to conform to any further legislation or guidelines. There is some self-regulation through the British Franchise Association (BFA). However there are many franchise businesses which do not become members, and many businesses that refer to themselves as franchisors that do not conform to these rules. There are several people and organisations in the industry calling for the creation of a framework to help reduce the number of "cowboy" franchises and help the industry clean up its image.
On 22 May 2007, hearings were held in the UK Parliament concerning citizen initiated petitions for special regulation of franchising by the government of the UK due to losses of citizens who had invested in franchises. The Minister of Industry, Margaret Hodge, conducted hearings but resisted any government regulation of franchising with the advice that government regulation of franchising might lull the public into a false sense of security. The Minister of Industry indicated that if due diligence were performed by the investors and the banks, the current laws governing business contracts in the UK offered sufficient protection for the public and the banks.

[top]Other Countries

Russia

In Russia, under ch. 54 of the Civil Code (passed 1996), franchise agreements are invalid unless written and registered, and franchisors cannot set standards or limits on the prices of the franchisee’s goods. Enforcement of laws and resolution of contractual disputes is a problem: Dunkin' Donuts chose to terminate its contract with Russian franchisees that were selling vodka and meat patties contrary to their contracts, rather than pursue legal remedies.


Kazakhstan

Until 2002, franchising rules in Kazakhstan were also governed by Chapter 45 of the Kazakh Civil Code (CC). Measures of state support franchising generally been included in the programme of support for business. Measures to promote franchising were provided in paragraph 2.4.1 of the state program for small business development and support for the 1999–2000. Key provisions of Chapter 45, as well as the rules governing the franchise in more detail relations, entered the law "About integrated business license (franchise)", dated 24 June 2002, No. 330 - II. It should be noted that amongst the Commonwealth of Independent States, Kazakhstan is one of the first countries to introduce the legal definition of franchising in a special law.

[top]Helpful Tips

Choosing the Right Franchise

There are many well-known franchise opportunities available in almost every industry you can think of. Some are well established with proven systems and support structures in place, while others are relatively new. Choosing the franchise that suits you will reduce risk and raise the levels of success.

While specialist advisors are a necessity to assist you throughout your business venture, the following steps will help you to evaluate any franchise opportunity you are considering.

1. KNOW YOURSELF

The first topic of research will be you. Consider your strengths and weaknesses. What is your level of knowledge, where might you need development and are your skills transferable? Will you be able to manage the high level of personal energy required to get yourself started? Are you a team player, or do you prefer to work alone? Will you require staff? Only after you have analyzed the depth of commitment required to start a new business venture will you be in a position to make a specific choice.

2. KNOW YOUR FINANCIAL COMMITMENTS

The costs of a franchise can vary considerably. While smaller investments can be affordable through personal assets, most potential franchise owners will need to consider additional borrowing. The increase in small business ventures have compelled many banks to have business start up kits, which include information on the requirements of starting a business, self evaluation reports and financial planning forms. No matter how much security you can offer, banks need to be convinced that loans can be serviced. What the proposed business can afford is more important than what you have.

3. KNOW WHAT FRANCHISING IS

Find out all you can about franchising. In particular focus on the unique relationship that exists between franchisees and franchisors. Look for a Franchise Association closest to you to obtain guidance from. Once again the banks can provide a wealth of information in this regard; it is now within their interests to build relationships in an extremely competitive financial environment by providing separate departments that serve the franchise industry. Search the internet, but be aware that different countries will have different compliance issues. Even if you have a preference this early in the game, research is still a vital process that needs to be completed. There is also the chance that research will open up alternatives you may not have previously considered.

4. KNOW THE INDUSTRY

You have already analyzed your skills and knowledge; now look at the different types of businesses that you feel are potentially suitable. Identify the different companies that are offering opportunities in the area. Consider the requirements of the proposed industry and see if it matches your skills and aspirations. It is not necessary for you to have worked in this industry before, but you need to feel comfortable and happy working in this environment. How durable is the potential market? Who are your customers? Who are your competitors? Is it an international franchise or newly introduced to your area? Is the market large enough to sustain a long-term business? Get to know the franchisor. You need to be happy with the industry you will be working in and with the people you will be working with.

5. EVALUTE THE FRANCHISE

Once it is established that you are interested in a particular franchise, information will be sent to you. Read all the information you receive thoroughly noting any first impressions and any initial questions you may have. Discuss and clarify any concerns you have with the franchisor. The size of the franchise should not restrict the availability of information you need regarding the company's history and profile, market conditions, the franchisees role and the costs involved. Examine company records in detail, check credit references. Closely examine the outline of the franchise particularly the manner in which the franchise is sold and operated. Look at all the details of any commissions’ payable on the sale of the franchise and ask to see references of present franchises and company outlets. Make sure you understand the components that make up the franchise fees.

6. QUESTIONS FOR THE FRANCHISOR

Carefully assess the franchisors interested in your business to ensure that they have sound backgrounds. The last thing you want to do is franchise your business to someone who isn't financially sound or has a poor track record. The greatest source of information you will obtain regarding the franchise system is from the franchisor. Prepare for every meeting with your list of items that need to be clarified. Ask all the questions you need in relation to the franchise, products and services. Do not be afraid to ask questions relating to the profitable viability of the franchise. You need to find out the success of the franchise, talk to other franchisees as well. What training and support exists? Is the franchise bound by any code of practice?

7. TALK TO THE FRANCHISEES

The surest method of evaluating any franchise will be to talk to a number of franchisees in existing businesses. In this way, you will get a realistic assessment. What value have they got from their business, both financial and personal? Make sure you chose the franchisees to speak with. You may not get a balanced picture if you speak only to 'approved' franchisees. The perspective of international outlets can also be of use, but, remember to consider different conditions, population structures and competition.

8. SPECIALISED FINANCIAL ADVICE

There could be some reluctance on the part of the franchisor to reveal financial projections in case they are viewed as guaranteed. However, what reports are available should provide relevant figures based on the existing climate. Whether the projections you receive are forecasted or guaranteed, an accountant with franchise experience should be able to give you qualified advice. Encourage your accountant to work with the franchisor. The franchisor will be able to offer cash flow, borrowing and overdraft guidelines. Take all the advice you can get. As a new business owner you do not want to start your business under capitalized.

9. SPECIALISED LEGAL ADVICE

It is important to fully understand the terms and conditions of the franchise agreement. Understanding your obligations and the franchisors responsibilities need to be clear from the start. Use a lawyer that specializes in franchise agreements to define legal terms you have difficulty with to save you time and money.

10. CHECK WHAT YOU ARE PAYING FOR

Before you sign on the dotted line, make sure you know what the up-front franchise fee includes and what refunds you may expect if you change your mind or fail the training. What are the performance criteria? You must also have a clear understanding of any ongoing costs. You need to know what fees are payable, how they are calculated and what they are for.

To maximize your chances of success it is imperative you do not rush your decision. Check out all aspects before you commit yourself. Be 100% certain that the franchise is right for you before you part with your money.

[top]Franchise Agreement

The Anatomy of a Franchise Agreement

Your entire franchise investment begins and ends with the franchise agreement. It is the first step and the last step before you embark on your journey as a franchise owner - and one which requires careful review, understanding and advising by a qualified franchise lawyer.

An Introduction to the Franchise Agreement

Now that you have the franchise agreement in your hands, you are a signature away from finalizing the franchise sale. The review of the franchise agreement may only take a week or so to be assessed by your lawyer. But first, you should have general understanding of its contents and the terms and conditions outlined within.

Grant of Franchise

The Grant of Franchise is the introductory statement made in all franchise agreements, found at the beginning, that outlines the general terms of the franchise opportunity and the commitments that you will be bound by. It may include the term (or length of) the agreement and any renewal options.

Payment of Fees

Your franchise agreement will contain a number sections that outline the fees due to the franchisor at various stages of the franchising process and once you are operating.

Training Program

As a new franchisee, the franchisor is obligated to conducting an Initial Training Program for all members affiliated with the franchise opportunity. While the cost of the training is included with your turnkey costs, any travel and lodging expenses at the training facility are not.

Territorial Rights

The Franchise Agreement outlines the rights you have that protect your business within a prescribed geographical area. In most cases, the franchisor is not permitted to sell other franchises within this territory to restrict competitive activity.

Site Selection

The site selection phase of the franchising process can be frustrating and time-consuming. Your real estate agent becomes your biggest asset in locating the perfect location for your franchise. The franchisor should have key territories master planned by development site to position your outlet in an area with heavy traffic and high exposure.

Site Development

If the franchise agreement states that you are responsible for developing the site location, it is critical that you hire a certified contractor who can follow the franchisor's building specifications and adhere to all local laws and building codes.

Sample Franchise Agreements

See the link below.

This site features a number of real franchise agreements from franchises you may recognize. They are fully downloadable but are for review purposes only. If you are interested in any one of these opportunities, contact the franchisor for an updated version.

About.com: http://contracts.onecle.com/type/79.shtml

[top]Other Resources

Consider Franchising - But Watch Out!

Having your own business is the American dream and, increasingly, international interest in owning a business has been building as well. There are many questions that must be answered before you consider owning a franchise or starting any business at all. The first question to ask yourself is: "Do I really have the right mindset that is required to work for myself"?
Read more:

Consider Franchising - But Watch Out!

Guidance regarding business purchase

If you intend to purchase a business, make sure your attorney has analysed the legal terms set out in the purchasing agreement and reviewed any other documents provided to promote the sale. Consulting your attorney will ensure that you are not only acting within the law, but you are also safeguarded against making a mistake.
Read more:

Guidance regarding business purchase

Choosing the Right Franchise

Choosing the Right Franchise

The Franchise Council Of Australia

Franchising in Australia represents a dynamic small business sector contributing some 14% of the national GDP of Australia.
Welcome To The Franchise Council Of Australia

Browse Franchises by Industry

Choose your best franchise opportunity from our industry categories...
Franchise Opportunities > Business Franchises for Sale & Franchising Opportunity Information

What No One Ever Tells You About Franchising

Real-Life Franchising Advice from 101 Successful Franchisors and Franchisees (What No One Ever Tells You About...) (Paperback)
Amazon.com: What No One Ever Tells You About Franchising: Real-Life Franchising Advice from 101 Successful Franchisors and Franchisees (What No One Ever Tells You About...): Jan Norman: Books

British Franchise Association

The British Franchise Association is the single regulatory body for franchising and the franchise industry in the UK.
British Franchise Association

How Franchising Works

Want to be your own boss? Franchising gives you the opportunity to own your own business while skipping some of the more detailed steps.
Howstuffworks "How Franchising Works"

Franchise Legal Issues

Franchising is governed by laws that require franchisors to inform all perspective franchisees about their company. Learning the franchise laws for your state is very important if you are deciding to buy a franchise.
Franchise Legal Issues - The Laws of Franchising


The Franchise Shop Network - Franchise Opportunities For Sale - UK

Search the UK's franchise directory for your perfect franchise. From low cost franchises to mid range and expensive franchise opportunities of all industries. Each entry has full franchise information and free franchise packs are available. The Franchise Shop Network top business franchises for sale range from cheap, low cost franchises and part time franchises for sale through to full time shop front franchise opportunities. Find your perfect franchise opportunity today... Franchises For Sale UK. Business Franchise Opportunities Directory

The Franchise Shop Network - Franchise Lead Generation and Franchisor Advertising - UK

Join The Franchise Shop Network and take advantage of the most efficient and cost-effective way to promote your franchise system to prospective franchisees. The Franchise Shop Network lead generation services guarentee to cut your cost per lead. Read more: Franchise Lead Generation. Advertise your franchise in our directories.




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