Franchising Continued…

Legal concerns

All franchise agreements fall under the legal jurisdiction of the Federal Trade Commission, and both the federal and state governments have enacted regulations and laws governing the franchisor/franchisee relationship. In particular, franchisors are required to give accurate earnings claims and disclosure statements to potential investors. The FTC also requires that there be a process to refund deposits and initial payments made by potential investors. In most cases, it is illegal for the parent company to take actions that may harm the franchisee. In any decision to enter into a franchise agreement, it is important to consult with an experienced franchise law attorney.

Interdependence and franchising, pros and cons

Franchising has a certain amount of dependence on the parent company built into the contract. Some of the same factors which can make franchising appealing can also hamper a creative entrepreneur.

The franchise is permanently tied to the parent company, and the agreement usually requires a degree of exclusivity. For example, a fast food franchise may only be allowed to sell food bought from its parent company and prepare and serve that food using equipment provided solely by the franchisor, even if comparable products are available at a lower price.

Another factor that can work both for and against a franchised business is corporate branding. The most successful franchises are based on the concept of quality. A customer can expect the same product, the same way, from any location. While this is good for a business that is just starting, it can hinder attempts to expand the business. Franchises are dependent on a positive public image. If some franchises damage that image by providing substandard services or products, this could result in profit loss for other franchises and even the parent company.

Even with a strongly franchised corporation, the brand may just not appeal to a given area, so a certain amount of market research is always a requirement.

By Matthew Bendert