A franchise is a system wherein one successful business allows another party to use its brand name and trademarked methods to replicate this success.
Parties to a franchise agreement include a franchisor and a franchisee. A franchisee purchases the right to replicate the franchisor’s business method, which logically will replicate the franchisor’s success. The hallmark of this relationship is to “Be in business for yourself, but not by yourself.” This is an essential principle, because even franchisees without formal experience or education can avoid the risks of starting up a business from scratch. While the chain grows, the franchisor continues to offer support, assistance, and marketing to maximize the franchisee’s success. This success, in turn, benefits the franchisor, who receives royalties from the franchisee.
The foundation of a franchise system lies in the licensing of intellectual property. Intellectual property can be any proprietary items that make the business successful, such as slogans, logos, names, uniforms, operations manuals, or training manuals. Registering trademarks and patents are essential, because a franchisee must be assured that the “tools for success” actually belong to the franchisor, and that the franchisor will protect the proprietary information from misappropriators and infringers.
The Federal Trade Commission regulates franchising. The FTC requires franchisors to provide a Franchise Disclosure Document (“FDD”) to potential franchisees. As the name suggests, the FDD discloses critical details about the franchise, so that potential franchisees have all the essential information to make an educated decision before entering into an agreement. There are 23 detailed items that must be disclosed, and each franchise in the country must disclose these items in a uniform manner. When the franchisor and franchisee sign a Franchise Agreement, they become bound by the terms of the FDD. The Franchise Agreement is a contract that binds each party into upholding the terms of the FDD.
Whether you are preparing to become a franchisor and set up a franchise system for your business, or you are a prospective franchisee evaluating an opportunity, Wood, Atter & Wolf can counsel and assist you every step of the way. We not only draft and review necessary documents such as Franchise Disclosure Documents and Franchise Agreements, but we can also secure the intellectual property rights that are crucial to a profitable franchise. In addition, we work closely with a team of experienced franchise consultants to analyze your business strategy. Contact us today — we are your franchise experts, and look forward to helping you create lasting and successful business relationships.