Franchise Questions

1. What is a franchise?

The franchise is the concession of exploitation rights of a product, activity or commercial name, granted by a company (Franchisor) to a third party (Franchisee) in a certain area (Territory). To reward the assignment of the use of the trademark, knowledge of the business, training and permanent advice, the franchisor receives a royalty or "royalty" from the franchisee, in addition to other payments for opening fees, advertising, initial training , etc.

The franchise is granted for a certain "territory" for periods that can vary from five to thirty years, depending on the type of business. The franchise has been around since feudal times when lords collected royalties from their subjects in exchange for the use of their land, but it didn't rise to prominence until the 1950s when McDonald's began operations in the US. According to the International Franchise Association approximately 4% of all businesses in the United States belong to a franchise system.
Read in our BLOG What is a Franchise?

2. What are the advantages and disadvantages of owning a franchise?

The franchise system usually attracts buyers because it offers a recognized brand in the market; a proven method of successful operation; a training program; and the reduction of the risk inherent in opening a new business.

However, the Franchisor usually imposes a series of limitations and controls on the operation that prevent the Franchisor from modifying some essential aspects of the business at its discretion. In general, the Franchisor must approve the premises where the business will operate; will supervise the use of its distinctive signs, brands, uniforms and decoration; strictly limit sales to its product range; will impose the methods of operation and will restrict the market to a specific territory.

3. Is the franchise a formula for success?

Statistics indicate that the possibility of failure to install a franchise is substantially lower than that of a new business.
When an entrepreneur decides to transform his business model into a franchise system, it is because he has proven to be successful. It is likely that during the initial steps that entrepreneur had to overcome numerous obstacles before coming to define the ideal scheme, worthy of being copied, that represents the idea of ​​​​the franchise.

When the transformation of the conventional company towards the franchise system takes place, a series of support tools are generated for the managerial management of each franchised unit, which are the product of the initial experiences. In this way, the Franchisee receives from the Franchisor the training and documentary support that will allow him to install his franchise in the short term and meet the market requirements without wasting time.

In the same way, together with the experience of the Franchisor, the possibility is also transmitted to the Franchisee of joining a network that facilitates the internal transfer of information and the use of economies of scale in the purchase of supplies and hiring of services.

Although the commercial format of the franchise has been successfully tested, it could happen that it does not offer similar results in some cases in which the Franchisee does not meet the required management conditions or that the chosen geographical location is not optimal.

Like any business, contracting a franchise implies risk factors that are sublimated if the rules established by the Franchisor are applied and the necessary effort is dedicated to starting and sustaining a competitive business.

4. What should I expect from the franchisor?

The Franchisor must provide the Franchisee, through training and documentation, with all the necessary knowledge to operate the franchise satisfactorily. In addition, the Franchise Agreement must contemplate the assignment of the right to use the trademarks and patents owned by the Franchisor, for a certain period.

In general terms, the Franchisee must expect permanent support from the Franchisor in terms of advice, continuous training and access to new developments in products, services and management strategies.

5. What is the “Franchise Disclosure Document”?

Once you have selected the franchise of your choice, it is necessary to evaluate the legal aspects that would govern your relationship with the Franchisor.

Franchises operating in the US are regulated by the Federal Trade Commission (FTC). To ensure that the Franchisors present a transparent picture of their activities to the Franchisees, the FTC requires them to present a disclosure document (Franchise Disclosure Document or FDD) of the operational aspects of the franchise, before the signing of the Agreement.

The FDD is a comprehensive document, with 23 sections, which includes the following aspects:

• Management Structure of the Company. History and Experience of the Franchise.
• Legal Status: Pending, imminent and past litigation.
• Fees to be collected during the opening, operation and termination processes.
• Details of other agreements of the Franchisor with the other Franchisees.
• Restrictions related to the products and services offered.
• Statistics on existing vs. closed franchises.
• Trademarks, patents, copyrights and other intellectual property rights.
• Capital investment, required purchases and territorial exploitation rights.
• Requirements to be a Franchisee and expectations of the parties during the contractual relationship.

The FDD must be delivered to the Franchisee no less than 10 days prior to the signing of the Franchise Agreement.

6. Should I hire a specialized lawyer?

Yes, it is important to hire a specialized lawyer to help the buyer evaluate the franchise agreement and the other complementary documents. To contact the lawyer specialized in franchises, it is advisable to consult the American Bar Association or the Florida Bar.

American bar association
321North Clark Street
Chicago, IL 60654-7598
312.988.5000
www.abanet.org

The Florida Bar
651 E Jefferson Street
Tallahassee, FL 32399
(850) 561-5600
floridabar.org

 

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