Before going any further, it’s time to get up to speed with the complexities of franchise legislation.
We spotted a thorough roundup on the topic of state and federal franchise laws in a recent blog post at TweakYourBiz.com that is well-suited to the necessary first step towards growing a successful franchise organization.
Given the strong presence Sintel Systems has in the retail, restaurant and service industries’ point of sale marketplace, we share articles and commentary with our customers and franchise hopefuls looking for key insights and opportunities in order to help them make the best decisions from the very beginning.
The article gives a good general understanding of franchise legislation, however TweakYourBiz.com recommends that you consult with an experienced franchise lawyer. Here are the highlights of the post, “Franchising your business? What you need to know about franchise legislation!”:
• State franchise legislation is anything but uniform. Also, state and federal laws that govern “business opportunities” and “seller-assisted marketing plans” can also apply to franchising.
• Overall, franchising is regulated by the U.S. Federal Trade Commission (FTC). State agencies’ franchise laws apply only when: the offer or sale of a franchise is made in the state; or the franchised business will be located in the state; or the franchisee is a resident of the state.
• According to federal law and under the FTC Franchise rule, three elements are required for a franchise, that is to say, Trademark. If these three elements are present, the relationship will be a “franchise” for purposes of the FTC Franchise Rule:
(1) Trademark: The franchisee has the right to distribute goods and services that bear the franchisor’s trademark, service mark, trade name, logo and other commercial symbol used for transaction.
(2) Significant Control or Assistance: The franchisor has notable control of, or provides significance to, the franchisee’s method of operation, which usually includes: approval of the site, requirements for site design or appearance, designated hours of operation, specified production techniques, required accounting practices, required participation in promotional campaigns, training programs, and providing an operations manual.
(3) Required Payment: To buy or own a franchise, the franchisee needs to pay the franchisor (or an affiliate of the franchisor) a minimum of US$500 either before (or within 6 months after) opening the business. The required payment includes any payments the franchisee makes to the franchisor to get the right of a franchisee. It would include franchise fees, royalties, and training fees, payment for services and payments from the sales of products (unless reasonable amounts are sold at bona fide wholesale prices).
• State franchise laws do vary, but all work upon a common theme. The TweakYourBiz.com post notes that in 12 states, the three elements of the legal definition of a “franchise” are:
(1) Marketing Plan: The franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system substantially prescribed by the franchisor.
(2) Association with Trademark: The operation of the franchisee’s business is substantially associated with the franchisor’s trademark, trade name, service mark, etc.
(3) Required Fee: The franchisee is required to pay a fee, directly or indirectly.
• Generally speaking, there are three categories of laws that regulate franchises:
(1) Disclosure Laws regulate required pre-sale disclosures, prohibited franchise sales practices, and mandatory cooling-off periods before franchise sales.
(2) Registration Laws require registration of the franchise, registration of franchise salespersons, and registration of franchise advertising.
(3) Relationship Laws govern certain aspects of the relationship between franchisor and franchisee, such as grounds for terminating a franchise, notice and cure periods before termination, grounds for not renewing a franchise, and equal treatment of franchisees.
• Among the most common types of violations of franchise laws include: offering or selling an unregistered franchise, failing to provide a UFOC on time, failing to provide all required disclosures in the UFOC, making misrepresentations to franchisee prospects, improperly terminating or not renewing a franchise.
• Governmental penalties for violating franchise laws include: fines, permanent bans on engaging in franchising, freezing of assets, and money damages for victims.
• Violations of state franchise laws are typically treated as a fraudulent and deceptive trade practice, or a misdemeanor, or a felony. Jail sentences may be applied to the franchisor, and to its officers, directors, and managers who formulate, direct or control the franchisor’s activities.
• The post notes that in some states, a franchisee who has been harmed by the franchisor’s conduct can be awarded money damages (including punitive damages and attorneys’ fees), or cancellation of the franchise agreement and reimbursement of all fees paid to the franchisor.
The post concludes with helpful commentary on what potential franchisees must consider when pursuing a franchise opportunity. Highlights of the section include the following salient points:
• Franchisee investment questions to be considered include:
– How much money do you want to invest?
– How much money can you afford to lose?
– Are you purchasing the franchise alone or with partners?
– Do you need financing? Where’s it coming from?
– What’s your credit rating? Credit score?
– Do you have savings or additional income to live on while you start your business?
– Capability & skills
– Does the franchise require technical experience or special training or education?
– What special skill set can you bring to a business, and, specifically, to this business?
– What experience do you have as a business owner or manager?
– Your ultimate business objective
• It is helpful to write down your reasons for buying a particular franchise:
– Do you need a specific annual income?
– Are you interested in pursuing a particular field?
– Are you interested in retail sales or performing a service?
– How many hours can you work? How many are you willing to work?
– Do you intend to operate the business yourself or hire a manager?
– Will franchise ownership be your primary source of income or a supplement to your current income?
– Do you get bored easily? Are you in this for the long-term?
– Would you like to own several outlets?
– Apart from knowing Franchise legislation and legal requirement, you should also investigate the franchisor and business to make sure you are investing in the right franchisee.
• Under the FTC’s Franchise Rule, potential franchisees must receive a copy of the Disclosure Agreement at least 14 days before they are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor.
• Check the franchisor’s background along with the business background. Identify the executives and their general business backgrounds, their experience in managing a franchise system, and how long they’ve been with the company.
• Check the franchisor’s litigation history. Determine if the franchisor or any of its executives have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices, or are subject to any state or federal injunctions involving similar misconduct.
• Calculate initial and ongoing costs involved in starting and operating a franchise. Be sure to ask the franchisor about continuing royalty payments, advertising payments to local and national advertising funds, grand opening or other initial business promotions, business or operating licenses, product or service supply costs, real estate and leasehold improvements, discretionary equipment such as a computer system or a security system, training, legal fees, financial and accounting advice, insurance, health insurance, employee salaries and benefits, and the costs of compliance with local ordinances such as zoning, waste removal, and fire and other safety codes.
• Starting your business may take several months, so be sure to estimate your operating expenses for the first year, and your personal living expenses for up to two years. “Compare your estimates with what other franchisees have paid and with competing franchise systems,” writes TweakYourBiz.com. “You may be able to get a better deal with another franchisor. An accountant can help you evaluate this information.”
Read the full TweakYourBiz.com post here.
Before you make your franchise move, consider calling Sintel Systems for a free phone consultation to help weigh and understand your point of sale (POS) options. We serve as a franchise incubator for clients across the retail, restaurant and service industries, forming lasting partnerships with our clients that you simply can’t get from a reseller.
Sintel Systems is the only direct to end user full-service provider of tailored Point of Sale systems across retail, restaurant and service industries, including frozen yogurt shops, pizzerias, sushi restaurants, cafés and retail stores.
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