Generally, there are two main types of franchises:
- Entire business format franchise – The franchisee receives the use of the trademarks, reputation (good will), trade secrets, copyrights, and marketing and service information of the franchisor. Examples include McDonalds and 7-Eleven.
- Product distribution franchise – The franchisor distributes a particular product to franchisees, such as vending machines.
Before you decide on what franchise to purchase, you should investigate the background and nature of the franchise company. Some questions to ask include:
- What do other franchise owners say about the franchise?
- Does the franchise have name recognition or a good reputation (good will)?
- What does the franchise offer its franchisees as far as service for problems and questions?
- Have there been any lawsuits against the franchiser by a franchisee? What was the outcome?
- What is the required training?
- What are the prospective returns on having that franchise in your location?
The franchise agreement is the contract that establishes the relationship, including rights and obligations, of the franchisor and franchisee. Generally, the franchise agreement provides the following:
- The franchise fee
- Restrictions placed on the business management structure of the franchisee
- The cost of inventory
- The income the franchiser requires and when it will be calculated
- Length of the agreement
- A termination clause upon what event will the franchisor terminate the franchise agreement. For example, some franchisors require that if your franchise does not make a specified income, the franchise will be terminated.
It is best to have an attorney review the franchise agreement before you sign it.
Many franchise companies are subject to the strict guidelines of the Federal Trade Commission (FTC). The FTC requires, among other things:
- Uniform Franchise Offering Circular – A franchise company is required to distribute a uniform franchise offering circular that includes all legal and financial information about the franchise company to any individual interested in purchasing a franchise.
- Other Disclosures – The franchise company must also provide the franchise company’s brochure and all potential franchise agreements to the prospective franchisee at either the time of the first meeting, before a fee is paid or before the agreement is signed.
A business lawyer can help you determine whether you wish to become a franchisee, start your own business or buy an existing business. When entering into the franchise relationship, an attorney can help you negotiate a franchise contract that best suits your business goals and priorities. A lawyer may also help you find legal relief if a party to the franchise agreement does not perform as promised, or is imposing unreasonable requirements.