What Are the Rights of a Franchisor?
Franchises offer the advantage of a proven business system to business owners, along with a reduced risk of business failure that is attractive to many people. When purchasing a franchise, the business owner must sign a franchise agreement outlining certain operating procedures. Once complicated documents, franchise agreements are becoming easier to read, and you can expect the franchisor to claim some specific rights as part of the agreement.
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First Refusal
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The right of first refusal gives the franchisor the right to purchase your business before you sell it to anyone else. Generally, franchise agreements dictate that the franchisor must purchase the franchise for fair market value, which can be difficult to determine. The franchisor may be allowed to match an offer from another buyer. If the offer involves property trades or other unusual circumstances, calculating a matching offer could be difficult.
Company Stores
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The franchisor may establish its own franchised business locations, also known as company stores. If an individual franchise owner's franchise agreement does not offer sufficiently protected territories, one of these locations could be his competition. The additional stores could also increase name recognition for the franchise, resulting in increased business, depending on the circumstances.
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Restricting Markets
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Most franchisors restrict the individual franchisee's ability to grow his business outside of a specific territory or may prevent the franchisee from having more than a specified amount of customers. This can restrict the franchisee's rate of growth and provide the opportunity for the franchisor to sell more franchises.
Financial Statements
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A franchisor can require a business owner to provide a detailed financial statement at a specific time period, usually monthly or yearly. The franchisor must be certain that the franchisee is operating using sound practices and is maintaining financial solvency. Franchisors may have minimum standards for cash on hand or require certain debt-to-equity ratios.
Inspections
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The franchisor may may want to perform an inspection periodically to ensure that the franchisee is operating to prescribed standards for cleanliness, or that the business is using the required advertising and point-of-sale materials. Franchisors may expect a certain customer experience and will want to be certain that the business is delivering.
Supplies and Inventory
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A franchisor can require the franchisee to purchase certain business and operating supplies or product inventory from approved sources, commonly the franchisor itself. This is to ensure consistency within with each franchised store. It also guarantees a sales opportunity for the franchisor.
Trademarks
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In most cases, the franchisor maintains the complete rights to its trademarked name and service marks. Any permitted use of these items by the franchisee will be clearly defined in the franchise agreement.
Revocation
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The franchisor will usually retain the right to terminate the franchise agreement if the franchisee does not comply with its provisions. This revocation is generally used to protect the franchisor's interest from a business owner who is operating a sub-standard business that could damage the franchise's reputation.
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