Entrepreneurs who have franchise businesses seek global opportunities, recognition, and maximum outreach to expand their business territories. While expansion seems effective and fruitful, it requires legal compliance for valid operational activation. It seeks a situation where the parties involved in the alliance gather effective and transparent terms and obligations for each other, in which both parties mutually consent to the business exchange.
However, the exchange is legal, and affirmation is fulfilled with the help of a franchise business attorney. The attorney diligently reviews the business opportunity, profit-making, growth, and compliance of the franchisor’s business proposed to the franchise. Because the process is lengthy, crucial elements remain constant to consider. Here, a leading franchise business attorney paves the way for legally binding arrangements for both parties and ensures both get their right to operate the franchise business with the utmost consideration.
The Most Important Elements Of Franchise Business
Setting up a franchise business adheres to many legally binding rules and regulations. Dominating the parties to comply with the set laws of franchise business, each state has its own enforced regulation and legal framework. These laws enhance the transparency and validity of a valid franchise set up within or outside the territory of the specific state.
1. Franchise Rule
The Franchise Rule ensures that anyone considering investing in a franchise receives all the essential information they need to explore the risks and benefits of their decision. This helpful Rule mandates that franchisors share a thorough disclosure document with future franchisees, which includes 23 specific items about the franchise being offered, its leadership, and insights from other franchisees.
2. Right To Offer, Sell, Or Distribute
An essential element of a franchise relationship is the franchisee’s right to offer, sell, or distribute the franchisor’s goods or services as per the agreement. This is the essence of a business relationship, where one party operates under the other party’s brand and image. The franchisee uses the franchisor’s business goodwill and reputation to market particular goods and services in their jurisdiction.
An absence of such rights decry the franchise agreements and operation. This element is more or less a test of independence. However, the employees, contractors, and general agents typically do not have the right to offer, sell, or distribute their principal’s goods or services independent of their status as employees, contractors, or agents.
3. Righteous Use Of Trademark And Other Intellectual Property
The definition of a franchise requires a substantial relationship between the franchisee’s business and the franchisor’s trademark or other intellectual property. They are especially governed under FTC rules and regulations.
However, each state has a different perspective regarding substantial usage. Still, the involvement of a franchisor’s trademark, its prominence in the business, and its license to a franchisee all compel the conclusion of a “substantial association.”
Key factors in determining a substantial association include the trademark used by the franchisee, their investment in the business, and advertising expenditures. A key test is whether the franchisee can use the franchisor’s trademarks in business operations.
4. Payment Of A Fee
Another common element of a franchise is the payment of a franchise fee. A franchise fee is generally defined as a fee or charge that a franchisee must pay or agree to pay in exchange for the right to enter into a franchise agreement.
The traditional franchise fee generally includes an upfront payment or ongoing royalty payments. Still, many other types of payments can qualify as franchise fees, and once again, labeling the payment as something other than a franchise fee does not matter.
5. Marketing Plan Or System
As many states in the USA require as a third element of a franchise business, a franchisor prescribes a marketing plan or system in a substantial part of the agreement. This element has two components:
- one is whether the franchisor maintains a marketing plan or system,
- and the second one, if it does, whether the plan or system is prescribed in substantial part by the franchisor.
However, a franchisor can draft strategies and marketing plans tailored to the franchise agreement with the help of a franchise business attorney.
There’s no clear-cut test for either component and considering many different factors is important. In simple terms, if a franchisee has more rules about marketing and promotions, it’s more likely that a marketing plan or system is in place.
6. Community Of Interest
Under their statutes, many states require that mutual consent exist for franchise business setups for a franchise to exist. The most important factor is the “community of interest” between the franchisor and the franchisee regarding the franchisee’s business.
Applied thoroughly, this test analyzes how closely the franchisee and its business are tied to the franchisor regarding investments, control, financial contributions, and operations. Interdependence between the franchisee and the franchisor and some aspects of exclusivity are hallmarks of a community of interest.
Understanding a franchise business’s important aspects and elements can help the franchisor and franchisee create solid agreements. Working with a leading franchise business attorney can help navigate legal complexities, making establishing the franchise smoother and more manageable.
They can allow you to expand your franchise business in other territories while legally enforcing the operation under their control and surveillance.
