What is a Franchise

What is a franchise ... what it involves

Basically, a franchise is a business relationship that involves putting together a unique relationship between companies that want to sell a product or service (the franchisor) and businesspeople (the franchisee) who want to offer that product or service on a local level.

More particularly, a franchise can be defined as a business relationship where a franchisor (a company or individual who owns the franchise system) grants a license to a franchisee (a company or person who contracts to use the franchise system) the right to use the franchisors trademark, brand and operating system for an initial fee (initial franchise fee). In return the franchisee pays a percentage of the income back to the franchisor (a royalty).

What Is A Franchise...working together

The success or failure of one party to this unique relationship generally determines the success or failure of the other party. In the franchise relationship between franchisor and franchisee no one entity is more important than the other. Working together they can grow the brand and value of every unit.

What is a Franchise...legal definition and meaning of a franchise

The legal definition of a franchise differs among the several states that have passed franchise registration statutes and the Federal Trade Commission (FTC). California was the first state to pass a franchising law, and defined as follows, is similar to the definition of franchise used by the other states that have franchise registration statutes.

Franchise means a contract or agreement, express or implied, whether oral or written, between two or more persons by which:

  • A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor;
  • The operation of the franchisee’s business pursuant to that plan or system as substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating, the franchisor or its affiliates, and;
  • The franchisee is required to pay, directly or indirectly, a franchise fee.

Franchise Regulation - Enforcement Agency

Federal Trade Commission (FTC)

The Federal Trade Commission is the federal government agency that, in part, oversees, regulates and enforces franchise related laws within the United States, including the franchise sales and disclosure process.

What is the Federal Trade Commission Rule?

It is a federal regulation which requires franchisors to prepare an extensive disclosure document and to give a copy to any prospective franchise purchaser before he or she buys a franchise. The disclosure document typically used to comply with the Rule is called a Uniform Franchise Offering Circular (UFOC). Many different categories of information are contained within the UFOC such as fees, basic investment, bankruptcy and litigation history of the company, the term of the franchise, the franchisor’s financial statement, whether or not a company claims earnings – all are presented in the disclosure document. It is strongly recommended that the potential franchisee review the disclosure document and franchise agreement with both their lawyer and accountant.

Definition of Franchising


Franchise Documents

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