The Pros and Cons of Running a Franchise Business
Franchise businesses are businesses structured with a franchisor who licenses specific trademarks and methods of doing business to a franchisee in exchange for recurring payments in the form of franchise fees.
The franchisor-franchisee relationship
A franchise agreement would be between the franchisor and the franchisee. This binds them together via contractual provisions and sets out the terms.
What is included in a franchise agreement
Franchising is a way for someone to sell their business, business idea or name to another person. A franchise agreement will typically define the territory in which the franchisee will operate. Franchise agreements would also detail how the franchisor will support franchisees’ business activities, including ongoing and intitial training, information systems, sales and marketing campaigns, as well as ongoing support.
Advantages of franchising for both franchisors and franchisees
Many franchise agreements today do not provide the franchisee with an exclusive territory and is something that should be taken into consideration when selecting the right franchise.
Potential disadvantages of franchising for franchisees
Franchising gives franchisees the opportunity to quickly start a new company based on a proven formula and trademark. This is in contrast to building a brand and business from scratch, which can be difficult when faced with aggressive competition from franchise owners.
Additional Benefits of Franchising for Franchisors
Franchising allows franchisors the opportunity to rapidly expand their brand across countries and continents. They can also reap huge profits by leveraging their network of franchisees who take care of customer relations and pay their own expenses. The franchisor can also build a network of captive distributors with minimal or no financial commitment.
Consistency: A Major Advantage of Franchise Establishments
Franchise establishments also provide a sense of desired consistency for many consumers. Most people know exactly what to expect when they walk in to a MacDonalds (for example), regardless of what the location or who the owner is.
The Biggest Disadvantage of Franchising: Losing Control
The biggest disadvantage Franchisees face when franchising: losing control. Franchisees can use a system, trademarks and training. However, they must follow the system and obtain approval from the franchisor for any changes.
Litigation Risks in the Franchisor/Franchisee Relationship
Another problem is that litigation can easily give rise to the franchisor/franchisee relationship if either side is incompetent or not walking in integrity. A franchisee who is incompetent can damage the reputation of the franchisor by offering inferior products and services. An incompetent franchisor could also cause the franchisees to lose their goodwill by failing to promote the brand correctly or attempting too hard for profits..
Franchising in the United States: Laws and Regulations
Because litigation is expensive, the majority of franchisors have inserted mandatory arbitration clauses into their agreements with their franchisees. Since 1980, the U.S. Supreme Court has dealt with cases involving direct franchisor/franchisee conflicts at least three times, and two of those cases involved a franchisee who was resisting the franchisor’s motion to compel arbitration. Both of the latter cases involved large, well-known restaurant chains (Burger King and Subway).
The Importance of Uniform Franchise Offering Circular (UFOC)
In the United States, franchising falls under the jurisdiction of a number of state and federal laws. Franchisors are required by the Federal Trade Commission to have a Uniform Franchise Offering Circular “UFOC” to disclose potential franchisees about their purchase. This disclosure must take place ten days prior to solicitation. Each state may require the UFOC to contain specific requirements. This means that many franchisors have a unique UFOC for each state or sometimes are able to include all state specific requirements into one document.
Need Help with Franchise Legal Issues? Get Quick Access to Franchise Lawyers
If you are considering buying a franchise or are an existing franchisor or franchisee needing help with franchise related legal issues, you can get quick and easy access to Franchise Lawyers in your area offering sound legal help and assistance forsimply by completing the form at the top of this page.