A franchise, by definition is a legal agreement that allows one organization with a product, idea, name or trademark to grant certain rights and information about operating a business to an independent business owner. In return, the business owner (franchisee) pays a fee and royalties to the owner. This one-time fee paid by the franchisee to the franchisor is referred to as a franchise fee. The fee pays for the business concept, rights to use trademarks, management assistance and other services from the franchisor. This fee gives the franchisee the right to open and operate a business using the franchisor’s business ideas and products. A royalty fee is a continuous fee paid by the franchisee to the franchisor. The royalty fee is usually a percentage of the gross revenue earned by the franchisee. The Federal Trade Commission (FTC) is authorized by the United States Congress to regulate the franchise business. The Federal Trade Commission oversees the implementation of the Franchise Trade Rule, which requires that franchisors disclose all pertinent information to potential buyers of a franchise, and monitors the activities of franchisors.
There are four basic types of franchises used by businesses in the United States.
Product Franchise: Manufacturers use the product franchise to govern how a retailer distributes their product. The manufacturer grants a store owner the authority to distribute goods by the manufacturer and allows the owner to use the name and trademark owned by the manufacturer. The store owner must pay a fee or purchase a minimum inventory of stock in return for these rights. An example of this type of franchise is a tire store.
Manufacturing Franchise: These types of franchises provide an organization with the right to manufacture a product and sell it to the public, using the franchisor’s name and trademark. This type of franchise if found most often in the food and beverage industry. Most bottlers of soft drinks receive a franchise from a company and must use its ingredients to produce, bottle, and distribute the soft drinks.
Business Opportunity Ventures: These ventures typically require that a business owner purchase and distribute the products for one specific company. The company must provide customers or accounts to the business owner, and, in return, the business owner pays a fee or other cons...
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... agreement is signed.
A franchise sometimes involves signing two agreements, a purchase agreement and the franchise agreement itself. The purchase agreement is a short document simply stating that, subject to a suitable site being found, the franchisee will enter into the contract set out in the franchise agreement provided, of course, that the franchisee has read and approved the franchise agreement within a reasonable time. Having accepted this condition the franchisee pays the franchisor a deposit which forms part of the initial fee. The search for a suitable site as well as associated research into planning, permitting, viability of the site, etc. can begin. If no suitable site is found, the deposit is usually returned. However, if the franchisee rejects the site or changes his/her mind about the franchise, the deposit is usually forfeited.
The franchise agreement is a far more detailed document and covers the following areas:
1. Nature and name of the activity being franchised
2. Franchise territory
3. Term of the franchise agreement
4. Franchise Fees
5. Obligations of the franchisor and franchisee
6. Selling the business
7. Termination of the agreement
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