Chapter 36: Sole Proprietorships and Franchises
Types of Franchises
1) Distributorship 2) Chain'style business operation 3) Manufacturing arrangement
State Regulation of Franchises
1) State Disclosures 2) May Require Good Cause to Terminate the Franchise
Elements of Franchise Agreement
1) payment for the franchise 2) business premises 3) location of the franchise 4) business organization 5) quality control (means of control and degree of control) 6) pricing arrangements
Chain-style Business Operation
A franchisee operates under a franchisor's trade name and is identified as a member of a select group of dealers that engage in the franchisor's business •franchisee required to follow standardized or prescribed methods of operation and maintain certain standards of performance Example: fast-food chains
Distributorship
A manufacturer (the franchisor) licenses a dealer (the franchisee) to sell its product; covers exclusive territory Examples: car dealerships
Franchisee
A purchaser of a franchise; generally legally independent of the franchisor and economically dependent on the franchisor's integrated business system
Franchise Agreement: business premises
Agreement may specify whether the premises for the business must be leased or purchased outright and who is responsible for supplying equipment and furnishings for the premises
Franchise Rule: Reasonable basis for any representations
All representations made to a prospective franchisee must have a reasonable basis at the time they are made
Franchise
Any arrangement in which the owner of intellectual property (trademark, trade name, or copyright) licenses another to use that trademark, trade name, or copyright in the selling of goods or services
Importance of Good Faith and Fair Dealing
Courts usually try to balance the rights of both parties. If franchisor arbitrarily or unfairly terminates a franchise, the franchisee will be provided with a remedy for wrongful termination
Franchise Agreement: payment for the franchise
Franchisee pays an initial fee or lump-sum price for the franchise license May also require franchisee to pay a percentage of the franchisor's advertising and admin expenses
Franchise Agreement: business organization
Franchisor may require that the business use a particular organizational form and capital structure
Franchise Agreement: pricing arrangements
Franchisor may require the franchisee to purchase certain supplies from the franchisor at an established price. However, the franchisor cannot set the prices at which the franchisee resells at
Franchise Rule: Explanation of terms
Franchisors are also required to explain termination, cancellation, and renewal provisions of the franchise contract prior to signing
Franchise Rule: Projected earnings figures
Franchisors must indicate whether the projected earnings figures are based on actual data or hypothetical examples
Franchise Rule: Written or electronic disclosures
Franchisors must make numerous disclosures, either in writing or electronically online
Franchise Rule: Actual data
If sales or earnings projections based on actual data, franchisor must disclose the number and percentage of its existing franchises that have achieved this result
Federal Regulation of Franchises
Industry-specific standards: protect franchisee from unreasonable demands and bad faith termination
Franchise Rule
Requires franchisors to disclose certain facts to prospective franchisees: 1) Written or electronic disclosures 2) Reasonable basis for any representations 3) Projected earnings figures 4) Actual data 5) Explanation of terms
Franchise Contract
Specifies the terms and conditions of the franchise and spells out the rights and duties of the franchisor and the franchisee •If fail to perform duties, party may be subject to a lawsuit for breach of contract •If franchisee is induced to enter by franchisor's fraud misrepresentation, franchisor is liable for damages
Termination "for cause" Examples
Termination "for cause" include: 1) death or disability of the franchisee 2) insolvency of the franchisee 3) breach of the franchise agreement 4) failure to meet specified sales quotas
Means of Control
The contract will state that the franchisor is permitted to make periodic inspections to ensure that the standards are being maintained Limit franchisee's ability to sell the franchise to another party
Franchise Agreement: quality control
The day-to-day operation of the franchise business normally is left up to the franchisee Franchise agreement may specify that the franchisor will provide some degree of supervision and control
Franchise Termination
The franchise agreement specifies that termination must be "for cause" and then defines the grounds for termination
Manufacturing Arrangement
The franchisor transmits to the franchisee the essential ingredients or formula to make a particular product, who then markets the product according to the franchisor's standards Example: soft-drink companies
Franchisor
The seller of the franchise
Wrongful Termination of Franchise
The termination provisions of contracts are more favorable to the franchisor, who owns the trademark and the business, than to the franchisee
Degree of Control
The validity of a provision permitting the franchisor to establish and enforce certain quality standards is unquestioned. However, if exercises too much control, franchisor risks potential liability (respondeat superior)
Franchise Agreement: location of franchise
Typically, the franchisor determines the territory to be served