Franchise according to the dictionary means granting authorization to someone to sell or distribute a company’s goods or services in a certain area or certain places.
A franchise is a license granted by a company or firm on certain terms and conditions to an individual or firm to operate a retail outlet in a specified area or place. The company or firm which grants the license is called a franchiser, whereas, the individual who accepts the terms and conditions to operate a retail outlet is called a franchisee. Here the franchisee agrees to use the franchiser’s brand name, products, services, promotions, selling methods, add a display, and distributions on certain terms and conditions. The franchisee pays a fee to the franchiser for the license to sell its products, services, or goods.
This type of agreement helps both parties, the franchiser gets a new area to establish a business whereas the franchisee will get already developed brand products and having no guesswork about what to do because all development and decisions are made by the franchiser and everything is laid out, step by step, with nothing missing or left to chance, and it all works with precision.
The Legal Aspects of Franchising
In legal terms, the franchise is a contract. The franchisee is usually granted an exclusive territory in which he or she is the only distributor of the particular products or services in a specified place. The franchiser is obligated to assist the franchisee through advertising, promotion, research, and development, quantity purchasing, training, and education, etc.
In 1979 the United States legislature had enacted the laws to protect prospective franchisees from being deceived by the falsehoods of franchisers. The franchiser has to disclose all financial details such as profit, operating cost, recurring expenses, and five-year actual sales statement and these laws are known as financial disclose law.
A franchiser also has to disclose the background of the company including the business experience of its high-level executives and whether any of its executives, within the last seven years, have been convicted of a felony or involved in litigation franchise business fraud, or have been involved in any proceedings for bankruptcy. In addition to this disclosure factual description of the franchise and statement of the total funds to be paid such as initial franchise fees, deposits, down payments, prepaid rent, and inventory purchases is mandatory. Conditions must also be clear on recurring costs such as royalties, rent, advertising fees, etc.