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Industrial
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Texas Lawyer Practice Areas:
Franchise Law
Below
are some Frequently Asked Questions about our franchise and
distribution
practice. Franchisee questions are first, franchisor questions are
further down. If you have a question that you do not see here, please contact our firm, or visit our
blog.
What is
a franchise?
The
best way to answer this is by example. Let's suppose you have a
business that you have developed. You have in place an identifiable
trademark, and a method of doing business that you have used and that
works. You then want to sell a copy of that business model as a
prepackaged business for others to use. You are a franchisor, the
business you would sell would be a franchise and the buyer would be the
franchisee. In exchange for using your business model, the franchisee
would pay you an initial franchise fee and royalties (typically a
percentage of the franchisee's sales.) If you would like to discuss
your matter, please email
our
firm or call us at (214)
696-0021 (click to call). (Be sure to read our disclaimer
before
contacting us.)
What is
the difference
between a franchise and a license?
You
can sell a copy of your business in different ways. A franchise
typically refers to a business opportunity in what the franchisor
retains strict control over how the business is operated. This includes
the use of the company's trademark (called a license.) However, a
company may wish to allow another company to use its trademark, but not
necessarily run its business. This wouldn't be a franchise, just a mere
right to use a trademark. If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
What is
a UFOC?
A
UFOC is a Uniform Franchise Offering Circular. This is a federally
mandated set of disclosures that franchisors must give to potential
franchisees. This includes information about the franchisors, estimated
costs, and information about the franchise agreement. Note that many
states require additional disclosures on top of the UFOC. UFOC is the
old term, and has been replaed with the term FDD, which stands for
Franchise Disclosure Document. THey are essentially the same thing. If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
What is
a franchise
agreement?
A
franchise agreement is a lengthy contract between a company that has a
specific formula to operate a business (called the franchisor) and a
company wishing to copy the formula (called the franchisee. Typically,
the franchisee will pay a percentage of sales to the franchisor (called
a royalty). If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
What is
the difference
between a UFOC and a franchise agreement?
A
UFOC is a Uniform Franchise Offering Circular. This is typically a
short synopsis of some key terms contained in the franchise agreement.
The franchise agreement itself governs the relationship between the
parties.
If you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
What is
a distributorship?
A
distributorship is a relationship in which a supplier allows a
distributor to sell its products for it. Many times, this includes the
right to use the manufacturer's trademarks. If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
What
are the pros and cons
of buying a franchise?
Pros: If the franchise is done properly, then quite a bit of the
initial work has been done for you. In many franchises, the franchisor
has developed a working business model, and has know-how that will help
get your new business moving.
Cons:
Franchises are expensive, and have high start up costs. Also,
franchises typically remove control over the business from you. You
must also pay royalties on your sales, in addition to franchise fees
and other costs.
If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
What
does it cost to buy a
franchise?
There is no standard cost to buy a franchise. There are common fees and
types of fees, however. Some of the more common costs are listed below:
Initial franchise fee - This is typically a non-refundable initiation
fee you pay to the franchisor. This fee is simply for the privilege of
doing business with the franchisor. It also helps to eliminate those
who cannot otherwise afford to own or operate the franchise, and
creates a valuable incentive for purchases to stay with the franchise.
Royalty payments - This is typically a percentage of the gross sales of
the franchisee. In most cases, the franchisee is expected to pay this
fee regardless of whether or not the franchisee is profitable.
Commercial lease - Although this is usually not a fee paid to the
franchisor, it can represent a significant initial outlay and a
substantial commitment. Most, if not all, commercial leases require a
personal guaranty, and at least a three year term. In some markets, it
may be possible to negotiate the terms with the landlord, and to have
the landlord finance part of the "build out" for some of the project.
(For information about commercial leases, please visit
DallasOfficeSpaceOnline.com an affiliated site committed to assisting
people with locating commercial leases in north Texas.)
Initial inventory - You will typically have to stock the initial
location with a specified amount of inventory to sell.
Advertising - The franchise agreement may require you to spend either a
specific sum or a percentage of your sales towards advertising costs.
This can include local advertising, or
Furniture, fixtures and equipment - This typically includes specialized
equipment, such as electronic cash registers and computers, and may
also include specific types of decor and furnishings.
If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
What
kind of control would
a franchisor hold over my franchise?
The
"look and feel" of the franchised business is one of the most prized
and highly protected part of the franchise system. Accordingly, many
franchisors have tight controls on what the franchisee can do with the
franchise. On the upside, this ensures that franchisees stick to a
(hopefully) proven and reliable system for profitability. On the
downside, this may severely hamper the franchisee from exercising
business judgment. Some of the controls that a franchisor may exert
include the following:
Site selection. Many
franchisors require that franchisees have their work sites prepared.
While this may be pursuant to a franchisor's research on market
viability, it may be different from the wish of the franchisee.
Layout and decor. Franchisors may wish for their franchisees to display
a uniform image, or a uniform layout. This allows customers to easily
identify you as part of the franchised business. However, this may
drive up costs, as some franchisors may have seasonal changes, or
rotating displays.
Goods and services
offered. Franchisors may restrict the goods and services offered for
sale or require that goods and services be purchased only from approved
suppliers. Many franchisors want consistency with their franchise. As
such, you may not be able to stock the goods or sell the services that
are not part of the franchised system.
Business methods. Franchisors may require you to operate in a
particular manner, so that customers will identify your operation with
the franchise. The franchisor might require certain hours of operation,
use specific uniforms, and advertisements, or abide by their accounting
or methods.
Territory. Franchisors may limit
your business to a specific territory. These territories are typically
mapped out, or may be done by zip codes, geographical areas or other
identifiable means. These restrictions are to protect the other
franchisees from competition between franchises. However, if you are in
an under performing territory, it may make it difficult for you to move
to a more profitable locale. Further, these territorial protections are
typically protected with a non compete agreement.
If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
How
long do franchise
agreements usually last?
There
is no standard length for a franchise agreement. Typically, the amount
of the franchise fee correlates to the length of the franchise. Typical
time periods are five, seven, ten and fifteen years. In most cases,
neither side can terminate the franchise agreement absent a mutual
agreement, a breach or some other pre-defined event.
If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
How do
franchises end?
There
are several ways a franchise can end. The franchise may end on its own
terms (i.e. the franchise was for a five year term and five years
elapses). In most franchise agreements, the franchisee may elect to
renew the franchise for an additional time period by paying an
additional fee to the franchisor at the end of the term. Franchises may
also be terminated by agreement of both the franchisor and franchisee.
In some agreements, the franchisor has the option to purchase the
franchise from franchisee. Finally, franchises may be terminated if one
or both parties breach the franchise agreement. This often leads to
expensive litigation on both sides.
If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
Franchisor
Frequently Asked Questions:
Why
would l want to
franchise my business?
A
franchise is a useful tool to grow a business where the owners have a
profitable business model that can be easily replicated but you do not
have the time, energy or capital to open new locations. The franchise
model allows business owners to grow the business and the brand with
less capital compared to opening individual locations. Additionally,
franchises, if structured properly, should attract motivated
individuals who will have substantial time and money invested into the
franchise (and hopefully try to make the franchise profitable.)
If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
How do
I know if my
business can be franchised?
That
depends on the kind of business you have. Does your business rely
solely on your know-how and expertise? Or can you make a model of your
business that can run without your constant supervision? If your
business model lends itself to being easily being cloned, such that you
can train individuals how to run the business with minimal supervision,
then the business might be one that can be franchised. In order to
attract franchisees, the business should either be established, or have
a unique concept or product that will give it a competitive advantage.
If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
How do
I franchise my
business?
The
first step is to map out how you are going to franchise the business.
You need to be concerned about the produces you sell, how you sell
them, and the places you will be selling them. You then have to address
logistics: how will the products be distributed and sold? How will you
sell the franchised system to franchisee? You will also need detailed
financial statements, and other materials about the business for your
offering circular. Many of these issues should be identified prior to
drafting the franchisee agreement. Also, you will need to comply with
various state and federal disclosure rules.
If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
If I
prepare a UFOC, will
that allow me to offer franchises in all fifty states?
No. Many states require specific
disclosures in
addition to the UFOC. If
you
would like to discuss your matter, please email our firm or call us at (214)
696-0021 (click to call). (Be
sure to read our disclaimer
before contacting us.)
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Cases may be worked on jointly or referred. Even if you do not see your
specific issue listed here, please feel free to call our law firm. One
of our attorneys may still be able to help, or send you to a lawyer
referral service. For more information call us at (214)
696-0021 (click to call) or email
. (Be sure to read our disclaimer first.)
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(c) 2008, David L. Leon, P.C., Dallas Business Attorneys.
The Texas lawyer responsible for this site is David L. Leon.
Primary office in Dallas, Texas.
Matters may be worked on jointly or
referred. Please our disclaimer
before
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