Chapter 36: Sole Proprietorships and Franchises
Laws Governing Franchises
- Contract law - Laws established to protect franchisees from franchisors, like terminating franchise agreements - State statues
Reasons to Terminate Franchises
1) Death of the franchisee 2) Disability to the franchisee 3) Insolvency of the franchise 4) Breach of agreement 5) Failure to meet specified sales quota
Types of Franchises
1) Distributorship (Auto dealers and beer distributors) 2) Chain-Style Business Operation (Fast Food) 3) Manufacturing Arrangement (Soft-Drink Bottling)
Franchise Termination
1) Duration of franchise expires 2) "For Cause" like death, bankruptcy, breach of agreement - Franchisor must give Notice and an Opportunity to Cure
Disadvantages of Sole Proprietorships
1) Owner assumes all risk of loss and lawsuit 2) Liability can exceed insurance policy limits 3) Lack of continuity if owner is injured/dies/etc.
Advantages of Sole Proprietorships
1) Owner receives all profits 2) No documents need to be filed; Easy to start 3) Maximum control of the business 4) Only pay personal income tax
Franchise Contracts Specify
1) Payment for the Franchise 2) Business Premise (Leased or Purchased) 3) Location of the Franchise 4) Business Organization (Capital Stricture/ Type of Org.) 5) Quality Control 6) Pricing Arrangements
Franchise Rule Requirements
1) Written (electronically recorded) Disclosures 2) Reasonable Basis for any Representations 3) Projected Earnings Figures 4) Actual Data 5) Explanation of Terms
Sole Proprietorship
Anyone who does business without creating a separate business organization has a sole proprietorship
Franchise
Arrangement in which the owner of intellectual property licenses others to use it in the selling of goods and services
Franchisee vs. Franchisor
Franchisee- Purchaser of a franchise Franchisor- Seller of a franchise
Petroleum Marketing Practices Act
Prescribes the grounds and conditions under which a franchisor may terminate or decline to renew a gas station's franchise
Automobile Dealers' Franchise Act
Protects automobile dealership franchisees whose franchisors impose unreasonable demands and then terminate the franchise because of the dealer's failure to satisfy them
Franchise Rule
Requires franchisors to disclose certain material facts that a prospective franchisee needs in order to make an informed decision concerning the purchase of a franchise