Franchises are usually conferred on corporations, but natural persons can also acquire them. The grant of a franchise frequently contains express conditions and stipulations that the grantee, or holder, of the franchise must perform. Not every privilege granted by a governmental authority is a franchise.
What happens if a franchisee does not set up a business?
This typically happens when a franchisee is pressed for time, and has not yet set up a business entity by the time he signs the franchise agreement. The franchisee proceeds with signing because the franchise agreement specifically states the franchise can be transferred into a business entity at a later date.
Do I need a business entity for a franchise?
Business Entities In Franchising, And Their Limitations I’M BUYING A FRANCHISE: DO I NEED A BUSINESS ENTITY? By Brian A. Loffredo, Esq. The answer is yes.
What should a private equity buyer look for in a franchisee?
A private equity buyer will want to understand the types of control exercised by the franchisor (and reserved in the standard franchise agreement (s)) over the franchise system so it can assess the risk associated with the target business model and weigh it against other factors critical to ensuring the business model can continue to operate as is.
Are franchisees protected from liability from their franchisees?
However, while a business entity serves an important role in protecting franchisees, franchise owners should be aware that those protections are not absolute. Franchisees will almost never be permitted to escape liability from one important actor – their franchisor.
What is an example of a private franchise?
Examples of franchises include the Kentucky Fried Chicken and MacDonald's burger diner and 'take-away' chains. Individual franchisees are usually required to put up a large capital stake, with the franchisor providing back-up technical assistance, specialized equipment and advertising and promotion.
Can a franchise be owned by one person?
Franchises can be granted to sole traders, partnerships or limited companies.
How does a franchise differ from a privately owned business?
A franchise is a chance to own your own business, hire a staff, and generate income for yourself–just like a startup. The difference is that in franchising, someone else owns the brand; whereas in a company like Facebook, for example, the brand is property of the entrepreneur, Mark Zuckerberg.
What is your title if you own a franchise?
A franchisee is a small-business owner who operates a franchise.
Is a franchise a public or private company?
Most franchises remain privately owned, many by private equity firms and larger franchisor groups after being acquired. Franchises are unique business models, and are a world apart from most on any exchange.
Can 2 people own a franchise?
Franchise partners come in all shapes and sizes. There are partnerships where both partners are on the ground, assisting with the operating of various franchise locations. Then there are partnerships where one person may be focused on operations while the other is more of a financial stakeholder, or "silent partner."
What is an independent franchise?
An independent franchisee association is an organization of various franchisees usually within one franchise system. Depending on the specific type of business that you're involved with and how your marketing and outreach programs work, there's a number of different ways that such organizations could be put together.
What business type is a franchise?
A franchise is a business whereby the owner licenses its operations—along with its products, branding, and knowledge—in exchange for a franchise fee. The franchisor is the business that grants licenses to franchisees.
How do you tell if a business is a franchise?
However, franchised businesses typically post signage in their stores and notes on their marketing materials (brochures, websites, vehicles, etc.) indicating that they are independently owned and operated.
What are the two types of franchising?
There are two main types of franchising, known as Product Distribution Franchising (Traditional Franchising) and Business Format Franchising, which are conducted under a variety of franchise relationships.
Who controls a franchise?
Assuming you will be the majority shareholder and will take day-to-day responsibility for the operation of the business then you will be most definitely in control. However, remember that the purpose of that business will be to operate, under licence, an outlet of the franchisor's system.
Can a franchise owner be fired?
While franchisees are not technically employees of a franchise brand, they can be “fired” by franchisors, who reserve the right to terminate their contract “for cause.” This involves ending the relationship based upon a default under the franchise agreement.
Who is a franchise owned by?
A franchise is a business in which an established business owner – known as the 'franchisor' – sells the rights to use their company name, trademarks and business model to independent operators, called 'franchisees'.
How many owners does a franchise have?
There is only one 'franchise owner' and that is the franchisor, ie the business that developed the concept that's the subject of the franchise and which owns the rights associated with that concept.
How many people own a franchise?
Across the globe, one in seven businesses is a franchise – which equates to around two million franchised companies, employing 19 million people. According to the US Department of Commerce, franchising contributes a staggering $2.3 trillion to the global economy every year.
What are the legal requirements for a franchise?
Generally, the offer and sale of franchises find legal basis in laws such as:The Indian Contract Act, 1872.The Foreign Exchange Management Act, 1999 (FEMA).The Competition Act, 2002.The Trademarks Act, 1999.The Copyright Act, 1957.The Patents Act, 1970.The Design Act, 2000.The Income Tax Act, 1961.More items...
What is a privately held company?
A Privately Held Company is a company that is wholly owned by individuals or corporations. Corporation A corporation is a legal entity created by individuals, stockholders, or shareholders, with the purpose of operating for profit. Corporations are allowed to enter into contracts, sue and be sued, own assets, remit federal and state taxes, ...
What are the different types of private companies?
The most common types are Corporation, Limited Liability Partnership (LLP), Sole Proprietorship, and Non-Profit Organization.
Is it easy to start a private company in the USA?
Starting a privately held company in the U.S., Canada, and other countries is quick and easy , while in other countries such as India and China it is more challenging. Here are country-specific information resources for starting a private company: The USA. Canada. The UK.
What is the purpose of a franchise?
The primary objective of all grants of franchises is to benefit the public ; the rights or interests of the grantee, the franchisee, are secondary. A corporation is a franchise, and the various powers conferred on it are also franchises, such as the power of an insurance corporation to issue an insurance policy.Various types of business—such as water companies, gas and electric companies, bridge and tunnel authorities, taxi companies, along with all types of corporations—operate under franchises.
Why are franchisees being victimized?
In states without "good cause" laws, franchisees claim that they are being victimized by franchisors who want to reclaim outlets that have proven to be highly profitable. They allege that the franchisor imposes impossible or ridiculous demands that cannot be met to harass the franchisee into selling the store back to the franchisor at a fraction of its value. Company-owned outlets yield a greater profit to the franchisor than the royalty payments received from the franchisee. Other franchisees claim that their licenses have been revoked or not renewed upon expiration because they complained to various state and federal agencies of the ways in which the franchisors operate. Such controversies usually are resolved in the courtroom.
How long do franchisors have to disclose background?
A franchisor must disclose the background of the company—including the business experience of its high-level executives—for the previous five years; and whether any of its executives, within the last seven years, have been convicted of a felony, have pleaded nolo contendere to Fraud, have been held liable in a civil action for fraud, are subject to any currently effective court order or Administrative Agencyruling concerning the franchise business or fraud, or have been involved in any proceedings for bankruptcy or corporate reorganization for insolvency during the previous seven years.
What is a corporation charter?
The charter of a corporation is also called its general franchise. A franchise tax is a tax imposed by the state on the right and privilege of conducting business as a corporation for the purposes for which it was created and in the conditions that surround it.
How can a franchise be terminated?
A franchise can be terminated by the mutual agreement of the state that is the franchisor, and the grantee or the franchisee. It can be lost by Abandonment, such as when a corporation dissolves because of its fiscal problems. A mere change in the government organization of a political subdivision of a state does not divest franchise rights that have been previously acquired with the consent of local authorities. A franchise cannot be revoked arbitrarily unless that power has been reserved by the legislature or proper agency.
What is a special privilege?
A special privilege to do certain things that is conferred by government on an individual or a corporation and which does not belong to citizens generally of common right, e.g., a right granted to offer Cable Television service.
Where does the power to grant franchises come from?
Power to GrantThe power to grant franchises is vested in the legislative department of the government, subject to limitations imposed by the state constitution. A franchise can be derived indirectly from the state through the agency that has been duly designated for that purpose, such as the local transportation agency that can grant a franchise for bus routes. Franchises are usually conferred on corporations, but natural persons can also acquire them. The grant of a franchise frequently contains express conditions and stipulations that the grantee, or holder, of the franchise must perform.
What is the purpose of the franchise rule?
Purpose: The Rule is designed to enable potential franchisees to protect themselves before investing by providing them with information essential to an assessment of the potential risks and benefits, to meaningful comparisons with other investments, and to further investigation of the franchise opportunity.
How many states have franchise laws?
State Disclosure Law Claims: Each of the franchise laws in the 15 states with franchise registration and/or disclosure requirements authorizes private actions for state franchise law violations.
What is disclosure option for franchises?
Disclosure Option: Franchisors may make the required disclosures by following either the Rule's disclosure format or the Uniform Franchise Offering Circular Guidelines prepared by state franchise law officials.
Why do franchisors use UFOC?
Rule: Many franchisors have adopted the UFOC disclosure format because roughly half of the 13 states with franchise registration requirements will not accept the Rule document for filing. When a format is chosen, all disclosure must conform to its requirements.
How long do you have to give a franchisee to review the franchise?
Basic Requirement: Franchisors must furnish potential franchisees with written disclosures providing important information about the franchisor, the franchised business and the franchise relationship, and give them at least ten business days to review it before investing.
What is the refund rule for franchisors?
Refunds: The Rule requires franchisors to make refunds of deposits and initial payments to potential investors, subject to any conditions on refundability stated in the disclosure document (Part 436.1 (h)).
How long before a franchisee signs a contract is a violation?
Contracts: Failure to provide potential franchisees with final agreements at least 5 days before signing will be a Rule violation regardless of the disclosure format used. Refunds: Failure to make promised refunds also will be a Rule violation regardless of which document is used.
Why do business owners form entities?
One of the most common reasons business owners form business entities is to protect personal assets. Because business entities maintain a separate legal existence, business owners can use their entities to transact business, instead of obligating themselves personally.
Can a business take out loans?
It can take out loans, open bank accounts, own property, enter into leases, and engage in a wide variety of other business-related activities. The business entity conducts the activities of the business, and the owners therefore remain insulated from personal liability to third parties.
Do franchisees have to be personally liable?
As set forth above, most franchisors require their franchisees to be personally liable if they enter into the franchise agreement using a business entity. So the transfer situation described above does not put franchisees in a worse position than they would have been in had they originally used a business entity at the outset. However, the problem is that many franchisees enter into franchise transactions believing that a business transfer will relieve them from liability. Had they fully understood their personal liability would remain throughout the duration of the franchise agreement, they may not have proceeded with the transaction. For such individuals, the business transfer provisions can be misleading and can cause surprise down the road.
Can a franchise owner enjoin a franchisee after the franchise agreement is terminated?
If the franchise owner attempts to compete with the franchisor after the franchise agreement has terminated, the franchisor may be able to enjoin the owner from engaging in competition. At the licensing stage, franchisees often misunderstand whether they are personally liable under their franchise agreements.
Can a franchised business entity seek payment from the franchise owner?
For example, if the franchised business entity defaults on its royalty obligations, the franchisor can seek payment from the franchise owner. If the franchised business entity is terminated by the franchisor for any reason, the franchisor can seek breach of contract and other damages directly from the franchise owner.
Can franchise owners escape liability?
However, while a business entity serves an important role in protecting franchisees, franchise owners should be aware that those protections are not absolute. Franchisees will almost never be permitted to escape liability from one important actor – their franchisor. This is because most franchisors require their franchise owners to sign personal guarantees if a business entity is used.
Does a franchise transfer extinguish liability?
Unfortunately, the transfer almost never extinguishes personal liability. While most franchise agreements allow the franchise to be transferred into business entity, they do not specifically release the franchisee from personal liability. The transfer therefore obligates the new business entity, while the business owner also remains personally liable.
What does a private equity buyer want to know about franchising?
A private equity buyer will want to understand the types of control exercised by the franchisor (and reserved in the standard franchise agreement (s)) over the franchise system so it can assess the risk associated with the target business model and weigh it against other factors critical to ensuring the business model can continue to operate as is. This can be done by examining the applicable franchise agreements, operating manuals, standards, programs and policies.
Who determines whether a franchisor is exclusive or not?
A buyer should determine the franchisor’s termination and renewal rights, whether suppliers are exclusive or not, and whether there are minimum volume purchasing requirements imposed on franchisees, and also confirm whether the rebates, commissions or other payments made by suppliers or paid by franchisees through the purchase price are legally valid and whether they are subject to negotiation or other changes.
What should a prospective private equity buyer consider?
Any prospective private equity buyer should consider the restrictions on use and the allocation of the funds, as well as the reporting and auditing rights of franchisees. While atypical, consideration of whether the franchisor’s treatment of advertising funds creates a fiduciary or special confidential relationship between the franchisor and its franchisees should be made, as the creation of such relationships can potentially increase the buyer’s future legal liability to the franchisees.
What are the variables to consider when investing in a franchise?
In addition to confirming the stability of the revenue streams, the private equity investor will be looking at other variables such as the existence of hard assets like real property, the stability of the advertising fund, supplier arrangements and the existence of litigation or potential legal claims against the franchise system. And the private equity investor may want to sell the system or certain of its assets quickly, require the franchisees to make capital expenditures to acquire new equipment or offer new services or embark on a program to “clean house” by more robustly enforcing standards and terminating non-performing franchisees.
How do private equity groups leverage efficiencies in their supply chains?
These types of inquiries will also allow private equity groups that have a portfolio of franchise brands to leverage efficiencies in their supply chains by consolidating purchasing of certain products and services with a single or limited number of suppliers.
Is Forbes opinion their own?
Opinions expressed by Forbes Contributors are their own.
Should a prospective buyer confirm the target franchisor's position on the place an anti-poaching provision?
Any prospective buyer should confirm the target franchisor’s position on the place an anti-poaching provision has in the franchise relationship.
Why did a company go bankrupt?
Here, the question is "why did the firm go bankrupt?" If the market in which the firm operated and the fundamentals (and cash flow potential) are good, the reason could be bad management, lack of expense control, receivables collection, productivity, etc. This is a high-risk investment that can require high personal involvement. It can be very lucrative or devastating.
Why do small companies need extra cash?
The extra cash is needed to fund growth and new product innovations, among other things. This, along with the fact that smaller private businesses have historically had problems accessing new capital, enhances opportunities for private investment in these companies.
What is a PHB investment?
Investing in a PHB allows you to set an upfront exit provision for your investment. It can be made on the condition that it must be repaid by a certain date and at an agreed-upon rate of return. It may also be set as an option to exit or continue at a number of option dates.
When investing in a PHB, can you negotiate the rate of return required for you to invest?
When investing in a PHB, you can negotiate the rate of return required for you to invest, apart from company performance.
Can you get out of an investment unless an upfront provision was made?
Unless an upfront provision was made, it may be difficult to get out of your investment.
Is a privately held company a significant investor?
In a privately held business, you are more likely to be a significant investor and, as such, can influence operational decisions.
Can angel investors invest in PHBs?
PHBs may offer a variety of types of investment, both for angel investors acting on their own, or for investors who access them through a venture capital firm. Having chosen your access route, there are still a variety of choices to make regarding your level of investment.
How to sell a franchise?
Typically, if you want to sell your franchise business, many of the same terms and conditions will apply. But there are often additional provisions including: 1 written notice that includes the buyer’s name and purchase price, and 2 an offer to the franchisor to buy the business at the same price offered to the buyer (called a right of first refusal.)
What happens if a franchisor doesn't exercise the option to buy the franchise?
If the franchisor doesn't exercise the option to buy the franchise, you can sell to the buyer. But if a deal doesn't close in the required time frame, you must again give the franchisor written notice and right of first refusal.
What Does It Mean to Assign or Transfer Your Franchise?
When you bought your franchise, you entered into a franchise agreement giving you, the franchisee, access to products, services, or systems developed by the franchise owner (called the franchisor) along with certain rights like the use of the franchisor's name.
What happens if you want out of a franchise agreement?
If you want out of your agreement before it expires, you’ll need to do what’s called assigning or transferring the franchise—a process that gives someone else your rights and responsibilities under the franchise agreement.
What is a franchise agreement?
Your franchise agreement is a contract between you and the franchisor and, ...
What is the condition for a franchise to be transferred?
The conditions can vary depending on the type of franchise and the franchisor but usually require: Notice of your intent to transfer. Before you enter into any contract to transfer your franchise, you will usually have to give the franchisor written notice of your intention.
Can you be sued for royalties if you transfer a franchise?
In most cases you must agree to remain liable under the franchise agreement so that if the person to whom you are transferring the franchise breaks any of the rules of the agreement such as not paying royalties, you can be held responsible. You can even be sued by the franchisor for unpaid royalties.
Why are public company franchises more likely to trade at lower multiples than franchisees?
Public company franchisees may trade at lower multiples than those of franchisors because the franchisees do not control the brand. But publicly-traded multi-unit franchisees can nevertheless be significant companies in their own right. Publicly-traded franchisees include the following companies:
Who owns Pizza Hut franchises?
NPC International operates more than 1,250 Pizza Hut franchises and 140 Wendy’s franchises. NPC was acquired by an entity controlled by Olympus Growth Fund V, L.P. and certain affiliates in December 2011. At the time of the acquisition, NPC obtained debt financing that is registered with the SEC.
What is Diversified Restaurant Holdings?
Diversified Restaurant Holdings is a Nasdaq company. It owns and operates Buffalo Wild Wings franchises as well as its own brand, Bagger Dave’s Burger Tavern restaurants.
Who owns KFC and Taco Bell?
Morgan’s Foods Inc. , the owner of 68 KFC, Taco Bell and Pizza Hut Express franchises, was a public company until it was acquired in May 2014 by Apex Restaurant Management Inc. for roughly $20 million. Apex is one of the largest franchisees of Yum! Brands (KFC, Pizza Hut and Taco Bell) and Long John Silver’s restaurants.
I. Rule Overview
II. Rule Requirements
- Liability: Failure to comply with any of the six requirements is a violation of the Franchise Rule. "Franchisors" and "franchise brokers" are jointly and severally liable for Rule violations.
III. Business Relationships Covered
- Business Opportunities:There are also three basic prerequisites to the Rule's coverage of a business opportunity venture (Parts 436.2(a)(1)(ii) and (2)):
IV. Disclosure Options
- Presumption: The Commission will presume the sufficiency, adequacy and accuracy of a UFOC that is registered by a state, when it is used in that state.
v. Potential Liability For Violations
- Personal Liability:Individuals who formulate, direct and control the franchisor's activities can expect to be named individually for violations committed in the franchisor's name, together with the...
VI. Legal Resources
- Staff Advisory Opinions:Business Franchise Guide (CCH) ¶6380 et seq. (Interpretive opinions issued in response to requests for interpretation of coverage questions and disclosure requirements pursu...