Legal Responsibilities of Franchise Owners
If you buy a franchise, you create a legal relationship between yourself as a business owner and the corporation that owns the trademark, such as McDonalds or The Gap. Opening a franchise has advantages over going it alone: You're associated with a national name-brand that will provide detailed directions on how to succeed. It also comes with requirements and obligations, however, and a failure to live up to them could result in losing your franchise.
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Control
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As a franchise owner, it is often the case that the corporation makes many of your business decisions. If you're franchising a store or restaurant, you'll have to conform to the style and look of the company's other franchises, and the company may require you to offer the same line of products or the same menu all the other franchisees do. The company may also set your prices and hours of operation.
Geography
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It's common practice for a company to exercise veto power over where you open your franchise in order to prevent different franchisees from competing with each other. If you want to broaden your sales area or open a second franchise, the company may turn you down.
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Expenses
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As a franchisee, you have a legal responsibility to make payments to the franchisor. The payments begin with an initial franchise fee and possibly a "grand opening" fee for the franchisor to promote your store; you'll then have to pay royalties to the company for the right to use its trademarks in your business. Usually payments are based on monthly or weekly revenue, but you may have to make minimum payments even if business income is low; in some cases, you may have to keep paying even if the business closes.
Prevention/Solution
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If you're considering buying a franchise, federal law requires the franchisor present you with a detailed franchise disclsoure document at least 10 days before you make the purchase. The disclosure document spells out the costs of taking out and running a franchise; provides contact information for other franchisees; and lists the specific legal responsibilities the franchisor requires of you. If you have doubts about how much control you want someone else to have over your business, you can use the disclosure document to decide how much is too much.
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