Franchising Governance and Significance

Federal law defines and shapes the act of franchising. Under the Federal Trade Commission (“FTC”) Franchise Rule, also referred to as the “Amended FTC Rule” following an amendment effective July 1, 2007, the rule requires prospective purchasers of franchises the material information they need in order to weigh the risks and benefits of such an investment. Additionally, it requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees. (16 CFR Part 436).

Franchising, as a method of doing business, is where the franchisor:

  1. Significantly controls/assists a franchisee’s method of operation;
  2. Extends a license to the franchisee to distribute goods or services under, or operate using the franchisor’s trademark
  3. Requires payment of a minimal fee to the franchisor

It is important to note that the rule requires disclosure but not a registration requirement. Along with federal law, additional requirements vary from state to state; either requiring registration or other type of filing. Some perceived disadvantages of franchising exist such as

(1) the regulatory environment is complicated;

(2) this environment could impact the rapid expansion of business relationships;

(3) the idea of a long-term commitment- by either the franchisor or franchisee;

(4) potential conflict to name a few examples.

Perceived advantages, however, also exist:

(1) rapid and efficient brand development of a concept;

(2) franchisees use their own capital and run their own operations according to a set of predetermined standards;

(3) supply chain purchasing power can benefit both the franchisee and franchisor as the system grows and

(4) the franchisee has a profit incentive as a business owner- which ultimately benefits both the franchisee and franchisor.

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