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What Is a Business Franchise?

Many of us may refer to a store with multiple locations as part of a "chain" or franchise without really understanding the structure of these kinds of businesses. What is a business franchise? How are they formed, and how do they operate? The following article considers some of the aspects of franchises that make them distinct from other kinds of businesses.

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Who Owns the Business?

A business may have multiple locations without being a franchise. If the locations all have the same owner, then the business does not meet the definition of a franchise. A business franchise is defined by the structure of its ownership.

Franchising occurs when the owner of a business grants a license to one or more parties for the purpose of conducting business using the same trademarks, trade names, trade dress, and other identifying aspects of the business. The party granting the license is referred to as the "franchisor," while those purchasing licenses are referred to as the "franchisee."

The franchisor is frequently involved in specifying the products and services offered by the franchisees. They may also provide a system of operation, marketing tools, raw materials, training, and other forms of support.

Kinds of Franchising Relationships

There are two basic kinds of franchise relationships:

  • Product or Trade Name Franchising refers to franchises where the owner holds the right to a name or trademark, which is then sold or licensed to franchisees; or
  • Business Format Franchising refers to franchises where the franchisor and franchisee have an ongoing relationship in which the franchisor provides services such as site selection, training, marketing plans, and other tools for your business.

Individual states may have different business franchise definitions. Some states require a marketing plan or "community of interest" provision in their definition. The Federal Trade Commission (FTC) has its own business franchise definition that will generally apply when:

  • The franchisor licenses the right to use its trade or service marks to the franchisee;
  • These marks are used to identify the franchisee's business in marketing a product or service using the franchisor's operating method;
  • The franchisor provides the franchisee with support and maintains some degree over control over the franchisee's activities; and
  • The franchisee pays the franchisor a fee.

Certainly, every franchise involves a license, though not all licenses are franchises. Whether a business meets the federal or local business franchise definition may affect the kinds of disclosures that are required. However, these definitions do not greatly impact your rights when a disagreement arises since, in either case, a contract is involved.

Franchise Contracts

Franchises are built out of contracts between the franchisor and franchisees. As such, there are two places a franchisee can look to determine their rights and responsibilities within the relationship: the language of the contract itself and the relevant jurisdiction's contracts laws.

The franchise agreement creates many of the most important rights and obligations between the franchisor and franchisee, including the degree of control the franchisor may exercise over the franchisee, terms of operation, training requirements, trademark and copyright obligations, renewal and termination options, and other important details. The jurisdiction's laws indicate how contracts are interpreted and enforced when the parties have a disagreement.

Get Legal Assistance When Considering Franchise Opportunities

One of the great advantages of a franchise is that a relatively inexperienced businessperson can purchase a business that has many of the most complicated decisions have already been made by the franchisor. However, the difference in experience and sophistication between the prospective franchisee and franchisor can also make choosing and negotiating a franchise challenging. Consider contacting a local attorney with experience in franchise law to help locate and launch the right business opportunity for you.

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