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CHAPTER 35 FRANCHISING

CHAPTER 35 FRANCHISING. DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.). SIGNIFICANCE OF FRANCHISING. Franchising has helped the United States become world’s largest market.

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CHAPTER 35 FRANCHISING

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  1. CHAPTER 35 FRANCHISING DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

  2. SIGNIFICANCE OF FRANCHISING • Franchising has helped the United States become world’s largest market. • Currently, over 2,000 U. S. companies encompassing over 40 different economic sectors use this business method. • Franchising has developed into important and popular method of marketing and distributing business goods and services.

  3. DEFINITION • Franchise. • Oral or written agreement. • Expressed or implied agreement. • Franchisor grants to franchisee license to use: • Trade name. • Service mark. • Trademark. • Advertising. • Other symbol. • Franchisee must pay licensing fee.

  4. DEFINITION • Franchises into three categories: • Trade name franchising: Franchisee purchases the right to identify with Franchisor’s trade name. • Product distributorships: Franchisor licenses Franchisee to sell its product exclusively or with other products via limited distribution network. • Pure franchises: Franchisee operates under Franchisor’s trade name subject to Franchisor’s operating methods.

  5. BENEFITS OF FRANCHISING • Benefits to franchisee include: • Opportunity to start business despite limited capital and experience. • Goodwill. • Availability of franchisor’s business expertise. • Assured supply of materials and access to training and supervision.

  6. BENEFITS OF FRANCHISING • Benefits to franchisor include: • Franchisee’s investment of capital. • Goodwill. • Availability of an assured distribution network. • Larger asset base.

  7. FRANCHISING COMPARED WITH OTHER RELATIONSHIPS • Government view franchisor-franchisee relationship as employment relationship. • Ordinarily not deemed franchises are: • Cooperatives. • Concessionaires. • Joint ventures. • General partnerships. • Sales agencies. • Securities.

  8. SETTING UP THE FRANCHISING RELATIONSHIP • Franchisor will: • Choose franchise location. • Creates training programs. • Advertises the product. • Set stringent guidelines.

  9. SETTING UP THE FRANCHISING RELATIONSHIP • Franchisee will: • Follow Franchisor’s operating procedures. • Obtain liability insurance. • Meet workers’ compensation requirements. • Franchise agreements require franchisee to: • Buy from only certain suppliers. • Provide factors that could cause termination. • Contain covenants not to compete.

  10. SETTING UP THE FRANCHISING RELATIONSHIP • Because franchisees have limited bargaining power, federal and state law are designed to protect franchisees when entering and terminating their agreements.

  11. LAW AND STATUTES AFFECTING FRANCHISING • Several statutes have attempted to protect franchisees against abuses by Franchisors. • In shaping relief, courts turn to common law, powers of equity, or applicable statutes. • Statutes have improved the bargaining position of franchisees. • Federal Trade Commission has promulgated trade regulation rule on franchise disclosure.

  12. LAW AND STATUTES AFFECTING FRANCHISING • Antitrust laws may apply to aspects of franchising relationship. • Franchisors may terminate franchisee for: • Misconduct; • Failure to meet sales quotas; • Failure to observe quality standards; or • Failure to maintain investment levels. • Franchises are subject to antitrust law and the UCC.

  13. CHALLENGES TO FRANCHISING REGULATORY STATUTES • Because laws that protect franchisees also limit actions of franchisors, franchisors have challenged laws on constitutional grounds. • Challenges include: • Impairment of the obligation of contracts; • Due process; • Federal supremacy; and • Interstate commerce.

  14. THE FRANCHISING ENVIRONMENT • Industry Statistics: • International Franchise Association has promoted franchising as robust and viable method of conducting business. • Government reports that franchises account for 34% of all retail sales in the U.S. • Reports dispute data that indicate low failure rates for franchises. • Research has questioned the meaning of the numbers.

  15. INTERNATIONAL MARKETS • Industry data has not stanched the expansion of U.S. franchisees abroad. • Recent statistics show, Canada, Japan and Australia are the three largest markets for U.S. franchisors. • Foreign franchisors are setting up in the U.S.

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