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