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Franchise

The American Heritage Dictionary defines a franchise in its broadest business sense as "the granting of certain rights and powers to a corporation." In Europe, the word had political roots in which an entity was free of certain burdens and restrictions. Hence, it derives its meaning from Old French franchise, meaning to make free or exempt. It has come to mean a right or privilege.

In modern times, a franchise is an ongoing agreement by which a person permits the distribution of goods or services under a trademark, service mark or trade name, during which time the grantor retains control over others or renders significant assistance to others.

It is a system that uses primarily franchise owner capital for quick expansion of a business or brand.

The Federal Trade Commission defines three conditions that must be met in order for a license to be a franchise and hence its "Franchise Rule" would then apply to the franchise relationship.

"To be covered by the Franchise Rule, a business arrangement must also satisfy the three definitional elements of a "franchise" set forth in the Rule: (1) the distribution of goods or services associated with the franchisor's trademark or trade name; (2) the exercise of significant control over, or the provision of significant assistance to, the franchisee; and (3) the required payment of at least $500 within six months of signing of an agreement.

 

There are essentially two types of franchise business relationships. These are:

  1. Product distribution franchise: These are essentially exclusive supplier-dealer relationships. A franchisor licenses to a franchisee its trademark, logo and product.
  2. Business format franchise: Besides use of a franchisor's trade name and logo, a business format franchise inherits the complete operating system to deliver a product or service. In other words, it inherits a system of running a business.

For examples of each type, look at Blue MauMau's collection of Superbowl Franchise Advertisements. It should be noted that Blue MauMau deals with news, discussions and information regarding primarily business format franchises.

 

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Paul Steinberg's picture

What constitutes franchise fee?

This month the Michigan Bar Journal has an article by Howard Yale Lederman discussing what constitutes a "fee" for purposes of bringing a transaction under the ambit of the franchise law.

While focusing on Michigan, it is a good concise (3 page) overview of the question.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400