Structuring the Franchise Relationship

AuthorDennis E. Wieczorek and Max J. Schott II
Pages59-90
59
Structuring the Franchise Relationship
CHAPTER 2
Dennis E. Wieczorek and Max J. Schott II
Contents
This chapter outlines issues that should be considered in developing and struc-
turing typical business format franchise systems. Given that the success of a
franchisor and its franchisees is uniquely intertwined, the design and legal and
contractual aspects of the parties’ relationship is of critical importance.
The first part of the chapter analyzes the advantages and disadvantages
of franchising as a growth vehicle and how it compares with other methods of
business expansion. This analysis is followed by a discussion of single-unit fran-
chises, the three most common forms of multi-unit franchises, and general tips
for drafting franchise agreements.
I. Why Franchise? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
A. Advantages of Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
B. Disadvantages of Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
II. Other Methods of Business Expansion . . . . . . . . . . . . . . . . . . . . . . . . 64
A. Vertical Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
B. Joint Venture/Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5
C. Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
D. Dealerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
E. Sales Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7
F. Exemption-Based Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
III. Single-Unit Franchise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
IV. Multi-Unit Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
A. Area Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
1. General Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
2. Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
3. Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
4. Key Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4
60 Fundamentals of Franchising
B. Subfranchise Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
1. General Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
2. Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
3. Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
4. Key Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 0
C. Area Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
1. General Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
2. Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
3. Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4. Key Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5
D. Drafting Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6
E. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 0
Chapter 2 Structuring the Franchise Relationship 61
I. Why Franchise?1
The owner of a trademark or service mark can extend the reach of its brand in
several ways. It can do so itself or it can have third parties take on the task. A
third party may establish a relationship with the brand owner by buying a prod-
uct containing the brand or by setting up an outlet identified by the brand. If the
brand owner has created a model for operating a business under the brand and
that model can be replicated and taught to others, then franchising is a popular
structure for expanding the brand owner’s business. A franchise is typically
defined as a license to use a trademark and method of doing business in ex-
change for a fee. While modern business format franchising had its genesis in
the 1950s, franchising in various forms had been around for many decades
before that, albeit focused on product distribution schemes (described in more
detail below).
A. Advantages of Franchising
A brand owner arguably takes a leap of faith when it entrusts its brand equity to
a barely known third party. But it does so knowing that franchising offers a
range of advantages in terms of expansion of its business.2
First, franchising is a vehicle for accelerated growth. An entity that does
not have the capital to expand to new geographic markets may cede those mar-
kets to a competitor if it does not move quickly. By deploying franchisees in
multiple markets simultaneously, a franchisor can grow the brand at a more
rapid pace. Even if it prefers vertically integrated expansion, unless it has exten-
sive labor and capital resources, a brand owner cannot expand on the same
scale absent a franchising program.
Similarly, the engine of growth through franchising is fueled by capital
supplied by franchisees (to acquire real estate, purchase operating assets, estab-
lish a workforce, etc.). At least at the outset, a franchise program requires much
less capital than an expansion initiative funded by the brand owner. In addition,
capital may be more available to local owners and at more favorable rates.
1. This chapter does not address the issue of whether a particular concept is ripe for
franchising or “franchiseable.” For a discussion of this issue, see Kenneth F. Darrow, Mark
Siebert, & Phyllis Alden Truby, The Structural Elements of a Franchise System and Their
Economic and Legal Implication for Start-up and Existing Systems, in ABA 30th ANNUAL
FORUM ON FRANCHISING, W2, 1 (2007); Jim Meaney & Max Schott II, Starting a Franchise
System: Practical Considerations, Planning and Development, in ABA 33rd ANNUAL FORUM
ON FRANCHISING, W24, 5 (2010).
2. For additional discussion of the advantages and disadvantages of franchising, see
Darrow, Siebert, & Truby, supra note 1, at 12.

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT