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Texas Lawyer Practice Areas: Franchise
Frequently Asked Questions about our franchise and distribution practice (if you have a question you would like to see here, please email us, or post it to our franchise law blog)Franchisee Frequently Asked Questions:
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page.
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page.
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. If you would like to discuss your matter, please email our firm or call us at 214.696.0021. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page.
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 If you would like to discuss your matter, please email our firm or call us at 214.696.0021. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page.
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page.
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page.
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page.
What does it cost to buy a franchise?
There is no standardize 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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page.
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page
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. (Be sure to read our disclaimer before contacting us.) Click here to return to our Franchise Law page.
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