Franchising in the US

November 27, 2017

Franchising

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History of Franchising in the United States

The International Franchise Association (IFA) and the American Franchise Association (AFA) were formed to combat abuses in the industry. The IFA developed a code of conduct for licensors and the AFA formed a trade group to represent the interests of franchisees.

In 1978, the Federal Trade Commission (FTC) adopted its own set of rules and regulations.

Today, many States regulate the franchise industry.

More than 300,000 franchised small businesses operating in the United States account for an estimated $1 trillion worth of income each year and provide jobs for some eight million Americans.

An agreement between a franchisor and franchisee generally consists of the following:

• There is a transfer of products, know-how, and proprietary information developed by the licensor, either as a product or as a business format, that enables the licensee to conduct its business.

• Trademarks or service marks are licensed, so that business is done under a common name or logo type.

• There is an exercise of some sort of control by the franchisor over the manner and methods of the franchisee and/or the conduct of its business.

• And of course there are payments by the franchisee to the franchisor. These payments can be seen as initial up front fees, continuing royalties, product charges, etc. Royalties are typically charged on gross revenues of the licensor. Gross revenues are often described in different and complex manners and care needs to be taken in analyzing these charges.

Franchise agreements can be complex and complicated. An interested buyer should consult with experienced professionals and legal counsel.

Franchised companies have higher rates of success than non-franchised businesses. Sometimes, however, the business owners incomes are not what they expected or hoped for.

A business opportunity venture, may be deemed a franchise and covered by applicable laws, if the following are present:

• The licensee sells goods or services supplied by the franchisor, or possibly by other companies. The licensor may instruct the licensee where to buy the goods or services, or may sell the goods or services through a related company or business.

• The franchisor finds, rents, subrents, etc., business premises or retail sites for the goods or obtains locations for example vending devices or racks.

• At least $500 is paid by the licensee to the licensor within the first six months of the franchise.

Once deemed a franchise, the disclosure and compliance costs can be substantial.