Business Law Chapter 36

State Disclosures

-Disclosure documentation (Franchise Disclosure Document), including costs of operation, recurring expenses, profits earned, and substantiating of these figures

Advantages of Sole Proprietorship

-Easiest to start -Least regulated -Single owner keeps all the profits -Taxed once as personal income -Flexibility

Pricing Arrangements

-Franchises provide the franchisor with an outlet for the firm's goods and services. Depending on the nature of the business, the franchisor may require the franchisee to purchase certain supplies from the franchisor at an established price. (A franchisor cannot set prices at which franchisee will resell goods. Such price setting may be violation of state/federal antitrust laws. Franchisor can suggest retail prices but cannot mandate them)

Disadvantages of Sole Proprietorship

-Limited to life of owner -Equity capital limited to owner's personal wealth -Unlimited liability -Difficult to sell ownership interest -Personal Assets at risk

Types of Franchises

1) Distributorship: franchisor makes product, franchisee sells it (EX: Toyota manu --> Toyota SLO) 2) Chain Style Business Operation: a franchise 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. (EX: McD, Subway, Mr. Pickles) 3) Manufacturing or Processing Arrangement: franchisor gives franchisee essential ingredients or formula to make product (EX: Pepsi)

Requirements for all business forms

1. Business name registration. 2. Occupational licensing. 3. State tax registration (for instance, to obtain permits for collecting and remitting sales taxes). 4. Health and environmental permits. 5. Zoning and building codes. 6. Import/export regulations.

Sole Proprietorship

A business owned by one person -More than 2/3 of all U.S. businesses are sole proprietorships -99% of sole proprietorships in the U.S. have revenues of less than $1 million per year

Opportunity to Cure a Breach

A franchise agreement may grant franchisee the opportunity to "cure" an ordinary breach within a period of time to prevent termination

Franchisee

A person who buys a franchise

The Franchise Rule

A rule that requires the franchisor to disclose certain information to prospective franchisees -Violators of rule subject to civil penalties and FTC can sue on behalf of injured parties to recover damages -Rule requires franchisor to make numerous WRITTEN disclosures to prospective franchisees (must be reasonable)

Grounds for Termination Set by Franchise Contract

Agreements usually specify when franchises can be terminated for cause. If the franchisor unfairly terminates a franchise, the franchisee will be provided with a remedy for wrongful termination.

Quality Control by the Franchisor

Although the day-to-day operations of the franchise is normally left to the franchisee, the franchise agreement may provide for the amount of supervision and control agreed on by the parties.

Franchises

An arrangement in which the franchisor (owner of trademark, trade name or copyright) licenses franchisee to use the trademark, trade name, or copyright in the sale of goods or services

Degree of Control

As a general rule, the validity of a provision permitting the franchisor to establish and enforce certain quality standards is unquestioned. The franchisor has a legitimate interest in maintaining the quality of the product or service to protect its name and reputation.

Laws Governing Franchising

Because a franchise relationship is primarily a contractual relationship, it is governed by contract law -If the franchise exists primarily for the sale of products manufactured by the franchisor, the law governing sales contracts (Article 2 of Uniform Commercial Code) applies

Wrongful Termination

Because the franchisee makes a substantial investment to use, but not own, the franchisor's trademark, trade name, etc., both statutory and case law emphasize the franchisor's duty to act in good faith when terminating a franchisee.

Industry-Specific Standards

Congress has enacted laws that protect franchisees in certain industries, such as automobile dealerships and service stations. These laws protect the franchisee from unreasonable demands and bad faith terminations of the franchise by the franchisor.

The 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.

Trademarks

Designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products -Trademarks registered with U.S. Patent and Trademark Office (PTO)

Payment for the Franchise

Franchisee ordinarily pays an initial fee or lump-sum for the license. Franchisor relies on initial fee for profit. Sometimes franchisee is required to pay a percentage of franchisor's advertisement cost and other expensive.

Business Organization

Franchisor may require that the business use a particular organizational form and capital structure -May also oversee training/want specific training

Trade Secrets

Information owned by the company by which the company gains a competitive advantage -Trade secrets must be divulged to key employees -Some businesses have employees sign clauses to prevent them from sharing secrets

Notice Requirements

Most franchise contracts provide that notice of termination must be given. If no set time for termination is specified, then a reasonable time, with notice, is implied.

The Franchise Contract

Specifies the terms and conditions of the franchise and spells out the rights and duties of the franchisor and the franchisee

Franchise Termination

The duration of the franchise is a matter to be determined between the parties

Federal Regulation of Franchises

The federal government regulates franchising through laws that apply to specific industries and through the Franchise Rule, created by the Federal Trade Commission (FTC).

Business Premises

The franchise agreement may specify whether the premises for the business must be leased or purchased outright.

Franchisor

The seller of the franchise

May Require Good Cause to Terminate the Franchise

To prevent arbitrary or bad faith terminations, a state law may prohibit termination without "good cause" or require certain procedures be followed in terminating a franchise

Location of the Franchise

Typically, the franchisor determines the territory to be served. Some franchise contracts give the franchisee exclusive rights, or "territorial rights," to a certain geographic area.

Obtaining Loans

U.S. Small Business Administration (SBA) may be a possibility

State Regulation of Franchising

Varies but often is aimed at protecting franchisees from unfair practices and bad faith terminations by franchisors