Business Law Chapter 36

grounds for termination set by franchise contract

1)death or disability of franchisee 2)insolvency of the franchisee 3)breach of franchise agreement 4)failure to meet specified sales quotas

considerations for starting a business

1)ease of creation 2)liability of the owners 3)tax considerations 4)ability to raise capital

state regulations of franchising

1)require that a disclosure document be registered or filed with a state official 2) require that franchisor submit advertising aimed at prospective franchisees to the state for approval. 3)require disclosure of financial information along with facts sustaining the data. 4)may prohibit termination of franchise contract if there is no "good cause" or require that certain procedures be followed in terminating a franchise.

disadvantages of sole proprietorship

1)the proprietor has unlimited liability (legal responsibility) 2)personal assets are at risk to satisfy debts. 3)lack of continuity after the death of the proprietor. 4)difficulty in raising capital (or has limited capital)

advantages of sole proprietorship

1)the proprietor owns the entire business and receives all the profits (also assumes all the risks) 2)easier and less costly than starting any other kind of business 3)flexibility in making decisions 4)pays only person income taxes on business's profits

sole proprietorship

a form of business when the owner is the business. (anyone who does business without creating a separate business organization).

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 is generally required to follow standardized or prescribed methods of operation. (think, McDonald's)

franchise

an arrangement in which the owner of intellectual property licenses others to use it in the selling of goods or services.

quality control of franchise

franchise agreement may specify that franchisor will provide some degree of supervision and control. 1)means of control - franchisor will establish certain standards for facility. may limit franchisee's ability to sell the franchise to another party. 2)degree of control - the validity of a provision permitting the franchisor to establish and enforce certain quality standards is unquestioned. franchisor does not want to exert too much power though. franchisor may be held liable under respondeat superior doctrine.

business premises for franchise

franchise agreement may specify whether the premise for the business must be leased or purchases outright. might require reconstruction of building to meet terms of agreement.

opportunity to cure a breach of franchise

franchise agreement may state that franchisee may attempt to cure an ordinary, curable breach within a certain period of time after notice. franchisee's breach of duty of honesty and fidelity may be enough to allow for the franchisor to terminate the franchise regardless of provisions.

federal regulations of franchises

franchise agreements are governed by contract law. federal government regulates franchising through laws that apply to specific industries and through the Franchise Rule (created by the Federal Trade Commission).

payment for the franchise

franchisee ordinarily pays an initial fee or lump sum price for the franchise license (privilege of being granted a franchise). fee is separate from product cost. may also require franchisee to pay a percentage of franchisor's advertising and administration costs.

pricing agreements of franchise

franchisor cannot set the price at which the franchisee will resell the goods due that price setting may be a violation of state or federal antitrust laws, or both. franchisor can suggest prices though.

location of franchise

franchisor determines the territory to be served. franchise contracts may also give franchisee 'territorial rights' to certain locations.

business organization of franchise

franchisor may require business use a particular organizational form and capital structure. may also set standards (quotas, recording requirements, etc). may also decide the training process for new employees.

wrongful termination of franchise

franchisor's termination of a franchise often has adverse consequences for the franchisee. statutory, case, federal, and state law attempts to protect franchisees from the arbitrary or unfair termination of their franchises by the franchisors.

industry-specific standards

laws that protect franchisees in certain industries (typically from unreasonable demands and bad faith terminations by franchisors)

notice requirements of terminating franchise

most franchise contracts provide that notice of termination must be given within a reasonable time.

entrepreneur

one who initiates and assumes the financial risk of a new business enterprise and undertakes to provide or control its management

franchisee

purchaser of a franchise. can operate as an independent business person but still obtain the advantages of a regional or national organization.

the franchise rule

requires franchisors to disclose certain material facts that a prospective franchisee needs in order to make an informed decision. 1)written (or electronically recorded) disclosures 2)all representations made to a prospective franchisee must have a reasonable basis at the time they are made 3)projected earnings figures 4)present the actual data used in projections 5) explanation of terms of contract

franchisor

seller of the franchise

franchise contract

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

manufacturing arrangement

the franchisor transmits to the franchisee the essential ingredients or formula to make a particular product. franchisee then markets the product either at wholesale or at retail in accordance with the franchisor's standards. (think, Pepsi-Cola)

distributorship

when a manufacturer (the franchisor) licenses a dealer (franchisee) to sell its products. (think, automobile dealerships)

importance of good faith and fair dealings of franchise

when determining whether a franchisor has acted in good faith when terminating a franchise agreement, courts usually try to balance the rights of both parties. if courts perceives that a franchisor has arbitrarily or unfairly terminated a franchise, the franchisee will be provided with a remedy for wrongful termination. if franchisor's decision to terminate a franchise was made in the normal course of business and reasonable notice was given, the court will be less likely to consider the termination wrongful.