Franchise Law is the set of laws regulating franchisees' rights (the person in business) and franchisors (the owner). Having a good grasp of franchise law is essential when building a business.
An experienced, successful franchisor utilizes this knowledge and transfers it to the owners of the franchises are granted. Each owner receives a protected right to operate the business under the franchisor's name. In return, the owner pays the franchisor a franchise fee or simply a 'broken up' portion of the profits. This arrangement is beneficial to both parties: the franchisor is granted access to a new market through licensing and operation of the business, while the owner receives an established business and the franchisor's knowledge of that business' success. As a result, the franchisor can expend less effort up front while the owner receives an immediate revenue stream. It is also important to note that, if challenged, the agreement established through a license agreement is upheld, thereby protecting the franchisor's interests.
Franchise Business Model
Similar to the origination of the idea, franchising allows the franchisor to market its business model, brand, name, and mark to someone looking to start a company using those assets. The franchisee pays a royalty to the franchisor for using its business model, marks, and name and is granted access to the franchisor's distribution network from which it can purchase its products.
Franchising is the fastest and most efficient method of expanding a business into new markets. By choosing franchisees instead of opening new facilities, a franchisor can multiply its business quickly without dealing with employees, finding locations, or the inevitable outflow of cash.
Franchising in the United States: Culture of Franchising in America
The United States has a long history of franchise businesses, dating back to the 1930s when restaurants, food inns, and motels first gained popularity. As of 2005, 909,253 established franchised businesses generated $880.9 billion in output11 million jobs and 4.4 percent of all private-sector output. Well-known franchise-based brands include Subway, Pizza Hut (restaurants), 7-Eleven, Hampton Inns, and Marriott.
Legal Issues Revolving around Franchising
Each party to a franchise has several legal interests to protect. Franchisees have their legal interests to consider: securing the exclusive rights to their store, also controlling the business concept of their store, and protecting their store's brand; they must consider the potential legal liabilities of their actions or in actions as well as their tax implications associated with closing up shop.
Franchise agreements allow companies to expand their brand by selling the rights to use their method, name, and logos to independent business owners.
The independent business owners, or franchisees, invest their own money in the new franchise and receive a license to use the franchisor's model, name, and logos. The relationship between the franchisor and the franchisee is governed by a franchise agreement, which outlines each party's rights, responsibilities, and limitations.
Franchisees must follow the franchisor's directives and may be subject to penalties if they do not. For example, if a particular item is the franchisor's trademark, failure to use it can result in a breach and termination of the license, effectively putting the franchisee out of business.