History of franchises in the United States
The International Franchise Association (IFA) and the American Franchise Association (AFA) were formed to combat abuses in the industry. The IFA developed a code of conduct for licensors, and the AFA formed a trade group to represent the interests of franchisees.
In 1978, the Federal Trade Commission (FTC) adopted its own set of rules and regulations.
Today, many states regulate the franchise industry.
More than 300,000 small franchised businesses operating in the United States account for an estimated $1 trillion in revenue each year and provide employment to about eight million Americans.
An agreement between a franchisor and a franchisee generally consists of the following:
• There is a transfer of products, know-how, and proprietary information developed by the licensor, either as a product or as a business format, that enables the licensee to conduct its business.
• Trademarks or service marks are licensed, so business is conducted under a common name or type of logo.
• There is an exercise of some form of control by the franchisor over the manner and methods of the franchisee and/or the conduct of its business.
• And, of course, there are payments from the franchisee to the franchisor. These payments can be seen as up-front upfront fees, ongoing royalties, product charges, etc. Royalties are generally collected on the licensor’s gross receipts. Gross income is often described in different and complex ways and care must be taken when analyzing these charges.
Franchise agreements can be complex and complicated. An interested buyer should consult with experienced professionals and legal advisors.
Franchise businesses have higher success rates than non-franchise businesses. Sometimes, however, business owners’ income is not what they expected or hoped for.
A business opportunity company may be considered a franchise and covered by applicable laws if the following are present:
• The licensee sells goods or services supplied by the franchisor, or possibly by other companies. The licensor may direct the licensee where to purchase the goods or services, or may sell the goods or services through a related company or business.
• The franchisor finds, rents, sublease, etc., business premises or retail locations for the products or obtains locations, eg, vending devices or racks.
• The licensee pays at least $500 to the licensor within the first six months of the franchise.
Once considered a franchise, disclosure and compliance costs can be substantial.
