WHAT IS A FRANCHISE?

A franchise is a license to use a trademark in exchange for payment of fees or royalties and involves some material assistance from or control by the trademark owner. The typical business format franchise provides the franchisee with a comprehensive operating system that includes all of the systems, techniques and practices that the franchisee needs and training in their implementation. Usually, the franchisor also provides a marketing program and other support services.

From the franchisee's perspective, a franchise provides access to brand equity and customer acceptance that he could not build by himself and quickly teaches him a detailed and proven system for conducting a business with which the franchisee may have been previously unfamiliar.

For the franchisor, selling franchises expands the brand's business faster than it ever could by opening more company units but without sacrificing quality. Franchising has the singular advantage of using franchisees' capital rather than the company's own to increase distribution. The franchisor's comprehensive operating system combined with a quality assurance program to monitor compliance insures that all locations provide customers with a uniform product and a consistent level of service and satisfaction.

The law naturally takes a more technical view of the definition of "franchise." The Federal Trade Commission Franchise Rule (16 C.F.R. Part 436) governs relationships where the franchisor offers the right to distribute products or services in connection with the franchisor's trademarks or other commercial symbols in exchange for payments of at least $500 in the first six months where the franchisor exercises significant control over or provides significant assistance in the franchisee's method of operation.

The laws of several states have unique definitions of what constitutes a franchise, and this requires careful legal work to insure that a franchisor's business format and legal documents comply with both federal and state law.

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