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Understand the Legal Terms and Documents Associated with Franchising

Learning the Language and Interpreting the Information

Interested in being a franchisee (we'll assume that you know what that word means) but overwhelmed with the legal lingo and required paperwork? While it might be time to purchase a law dictionary or to obtain the advice of an attorney, we'll try to enlighten you on some of the often-cited terms and documents associated with the legalities of franchise ownership.

Terms:

• Business format franchise - An "all-inclusive" franchise that involves numerous interactions (e.g., assistance with obtaining financing, selection of a business location, training of all personnel, hiring of employees, marketing of products, etc) during the ongoing partnership between the franchisor and the franchisee, as well as the franchisee's right to use the trade name, products, and operational guidelines of the parent company
• Distributorships - A business structure, not always considered to be a true franchise, that allows a company to sell the products and/or services of the parent corporation, often without any additional royalties (see below) being paid
• Exclusive territory - The geographic area in which a franchisee is allowed to operate their business without the risk of a competing franchise being established within the designated location
• Initial cash required/initial investment - The amount of money that is required for the initial purchase of the franchise but that might not be "all-inclusive"
• Package format franchise - A phrase that's used interchangeably with the term "business format franchise"
• Potential earnings - Claims made by the franchisor pertaining to the income that a franchisee could potentially earn; such figures are based on the amounts reported by existing franchisees and must be documented as to how they were calculated, as well as detailing the relevant statistics pertaining to such owners
• Product/trade name franchise - A franchise that involves the sale of the right to use the franchisor's name and/or trademark along with the right to sell the parent company's products and/or services; not to be confused with a distributorship
• Royalties - A percentage of the gross sales proceeds that the franchisee is required to pay directly to the franchisor on a regularly scheduled basis
• Total cash required/total investment - The total amount of money that is required to purchase the franchise as well as any required advertising, equipment, inventory, etc purchase fees
• Turnkey franchise - A franchise that provides all of the necessary services to allow the franchisee to assume operation of the business with the simple "turn of a key"

Documents:

• Business Plan - While not always necessary for the purchase of a franchise, this document is used to secure financing from various lending institutions; such a document needs to include analyses of the target market, cash flow projections, relevant personal experience, etc
• Disclosure Statement/Uniform Franchise Offering Circular (UFOC) - A document that the Federal Trade Commission requires franchisors to supply to prospective franchise buyers; such a document includes detailed information pertaining to purchase fees, current and/or past franchisees, up-to-date audited financial statements, a copy of the proposed contract, operational restrictions, litigation history, etc
• Franchise Agreement - The actual contract between the franchisor and the franchisee that details the responsibilities of each party, the associated fees required, and the products/services supplied
• Offering Prospectus - Another phrase used interchangeably with "disclosure statement"
• Operations Manual - Outlines the operational procedures of the franchise that the franchisee must abide by

Extensive additional legal information as it pertains to franchising can be obtained at the Federal Trade Commission's (FTC) website (www.ftc.gov/bcp/franchise/netfran.htm). The FTC has put together a handy and easily understood "Consumer Guide to Buying a Franchise" which can be read at www.ftc.gov/bcp/conline/pubs/invest/buyfran.htm. Prior to signing a legally binding franchise agreement however, it's imperative that you consult with an attorney, preferably one that specializes in franchise law.

Good luck finding the perfect home business opportunity!

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