Franchises allow an entrepreneur to launch a business with at least some foundation to build upon. Leila Nourani, partner at Foley and Lardner LLP, specializing in distribution and franchise issues among others, raised a few essential points for any entrepreneur looking to open a franchise.


"According to Federal Trade Commission rules, the franchise should produce an offering circular to the owner of the business. The registration procedures for a franchise may vary according to the state and country where they will be located. A franchise agreement should be drawn up after this.


"The franchisee should then be handed operation manuals, a rundown of system policies and procedures and also thorough training to handle the product.


"Franchisees sometimes get involved in negligence claims and compliance issues. It is therefore important for the franchisor to ensure a good shield against franchise liability.


"The areas that franchisors can exercise control over are brand name, sales techniques, material distribution, training policies and services. The actual sales and efficiency of business is up to the franchisee. The franchisor has limited or almost no control over how successful or profitable the venture is going to be.


"The franchisee is required to pay a specific amount of royalty, frequently four to eight percent of total income, to the owner of the product or business. The franchisee has to produce records and accounts of sales to the business owner on a regular basis, depending on the franchise agreement.


"A franchise agreement is renewed if both parties are in good standing with each other. Renewal does not require any reinvestment from the franchisee. In some cases, the contract undergoes renegotiations as it concerns royalties whereas some others undergo automatic renewal.


"Frequently, when it is not renewed for a specified period but has expired, the agreement goes into a 30-day continuance and then becomes renewable on a monthly basis. The franchisor then has the right to terminate the agreement with a 30-day notice.


"If the franchisee is running at a loss for an extended period of time, most agreements provide for the deal to be called off."


*Case Study is a feature in which experts offer advice on the various challenges that small-business owners often encounter. If you face an issue or challenge you think applies to others as well, please contact the Business Journal at casestudy@labusinessjournal.com.

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