1. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 1 FRANCHISES AND SPECIAL FORMS OF BUSINESS © 2010 Pearson Education, Inc., publishing as Prentice-Hall CHAPTER 40

2. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 2 Franchising is an important method of distributing goods and services to the public. In the United States, franchising accounts for over 25 percent of retail sales and 15 percent of gross domestic product (GDP).

3. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 3 Franchise Franchisor licenses franchisee to use franchisor’s trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services. Franchisor and franchisee are usually established as separate corporations.

4. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 4 Advantages of Franchising Franchisor can reach lucrative new markets. Franchisee has access to the franchisor’s knowledge and resources. Franchisee runs an independent business. Consumers assured of uniform product quality.

5. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 5 Parties to Typical Franchise Agreement Grant of franchise and license to use trademarks, service marks, and trade secrets Franchisor (Licensor) Franchisee (Licensee)

6. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 6 Distributorship Franchise Franchisor manufactures a product and licenses a retail franchisee to distribute the product to the public. –E.g., Ford Motor Company manufactures automobiles and franchises independently owned dealers to sell them to the public.

7. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 7 Processing Plant Franchise Franchisor provides a secret formula or process to the franchisee. Franchisee manufactures the product and distributes it to retail dealers. –E.g., Coca-Cola Corporation licenses regional bottling companies to manufacture and distribute soft drinks under the “Coca-Cola” brand name.

8. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 8 Chain-style Franchise Franchisor licenses the franchisee to make and sell its products or distribute services to the public from a retail outlet serving an exclusive territory. –E.g., Pizza Hut Corporation franchises independently owned restaurant franchises to make and sell pizzas to the public under the “Pizza Hut” name.

9. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 9 Area Franchises Franchisee may be granted the authority to negotiate and sell franchises in the designated area on behalf of the franchisor. –Franchisee is a subfranchisor. –E.g., Starbucks could grant area franchise to Vietnamese company, which would choose individual franchisees in that country.

10. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 10 Example of an Area Franchise Area Franchise Franchisor Franchise Franchise Franchise Subfranchisor FranchiseeFranchisee Franchisee

11. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 11 State Disclosure Laws Many state statutes require franchisors to register and make specific presale disclosures to prospective franchisee. Most states use a uniform disclosure statement called the Uniform Franchise Offering Circular (UFOC).

12. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 12 Federal Trade Commission Franchise Rule FTC requires presale disclosures to prospective franchisees. –Disclosure of sales or earnings projections based on actual data. –Disclosure of sales or earnings projections based on hypothetical data. –Prescribed, prominent cautionary statements required. “There is no assurance you’ll do as well.”

13. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 13 Franchise Agreement Sets forth terms and conditions of the franchise. –Quality control standards –Training requirements –Covenant not to compete –Arbitration clause –Use of franchisor’s trade name, logo, and trademark –Conditions for the termination of the franchise –Etc.

14. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 14 Franchise Fees Usually stipulated in franchise agreement. –Initial license fee –Royalty fee –Assessment fee –Lease fee –Cost of supplies –Consulting fees and other expenses

15. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 15 Trademarks Franchisor licenses the use of its trademarks and service marks in franchise agreement. Anyone who uses a mark without authorization from franchisor may be sued for trademark infringement. Franchisor can recover damages and obtain an injunction prohibiting further unauthorized use of the mark.

16. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 16 Misappropriation of Trade Secrets Anyone who steals and uses franchisor’s trade secret is liable for misappropriation of a trade secret. Misappropriation is unfair competition. Franchisor can recover damages and obtain an injunction prohibiting further unauthorized use of the trade secret.

17. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 17 International Franchising U.S. franchisors may seek to expand internationally without capital investments required for company-owned stores. Foreign franchisee offers insight into cultural and business traditions of foreign company. Foreign franchising laws may differ significantly.

18. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 18 Independent Contractor Status If properly organized and operated, the franchisor and franchisee are separate legal entities. The franchisor deals with the franchisee as an independent contractor. –A franchisee is generally not the agent of the franchisor. –The franchisor is not liable for the franchisee’s contracts and torts.

19. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 19 Contract and Tort Liability Franchisors and franchisees are liable for their own contracts. Franchisors and franchisees are liable for their own torts. –If a person is injured by a franchisee’s negligence, the franchisee is liable.

20. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 20 Apparent Agency Franchisor creates the appearance that franchisee is its agent, when in fact an actual agency does not exist. The franchisor is liable for the contracts entered into and torts committed by the franchisee acting as an apparent agent.

21. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 21 Termination at Will Most state and federal laws regarding franchising prohibit franchisors from terminating franchises at will. Prevents a franchisor from taking advantage of the good will developed at the franchise location by the franchisee.

22. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 22 Wrongful Termination If franchisor terminates a franchise agreement without just cause, franchisee can sue franchisor for wrongful termination. Franchisee can recover damages caused by the wrongful termination and recover the franchise.

23. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 23 Termination “For Cause” Breach of franchise agreement permits non- breaching party to terminate it. –E.g., nonpayment of franchise fees by the franchisee; –Continued failure to meet quality control standards.

24. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 24 Breach of Franchise Agreement Lawful franchise agreement is enforceable contract. Each party owes a duty to adhere to and perform under the terms of the franchise agreement. Aggrieved party can sue breaching party for rescission of the agreement, restitution, and damages.

25. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 25 Licensing Owner of intellectual property (the licensor) contracts to permit another party (the licensee) to use the intellectual property. –Trademarks, service marks, trade names, copyrights. Licenses issued for distribution of goods, services, software, and digital information. –E.g., Walt Disney Company licenses right to Winnie the Pooh character.

26. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 26 Joint Venture Two or more business entities combine their resources to pursue a single project or transaction. –Unless otherwise specified, joint venturers have equal rights to manage the joint venture. –Joint venturers owe each other the fiduciary duties of loyalty and care.

27. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 27 Joint Venture Partnership Each joint venturer is a partner of the joint venture. Each joint venturer is liable for the debts and obligations of the joint venture partnership.

28. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 28 Joint Venture Partnership Joint Venturer Joint Venture Partnership Investment of capital

29. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 29 Joint Venture Corporation Joint venturers are shareholders of the joint venture corporation. The joint venture corporation is liable for its own debts and obligations. Joint venturers liable only up to their capital contributions.

30. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 30 Strategic Alliance Two or more companies in the same industry agree to ally to accomplish a designated objective. –To share costs, combine technologies, expand into new markets. Strategic alliances do not have the same protection as mergers, joint ventures, or franchising.