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Advisory councils See franchisee association.
Annual renewal fee The franchise contract granted by the franchisor may only be for a 12-month period with the franchisee having the option of automatic renewal at the end of the period on payment of an annual renewal fee. This figure can be a set sum, or in some way related to the size of the franchisee's business at the time of renewal (turnover, size of premises, number of items of key equipment). It is not standard practice to charge an annual or any other renewal fee, and such impositions are rarely found in franchise contracts. See also: renewal.
Area development agreement This allows the franchisee (area developer) to open a specified number of units in its allocated territory but, unlike a regional master franchisee, it would not normally act as a sub-franchisor and sell franchises in its area.
Bank franchisee finance package A loan scheme by banks to provide the franchisee with some of the finance to buy a franchise, and set-up and operate the business. Usually, restricted to a maximum of two-thirds of the total investment (larger loans are sometimes available from finance houses) because of the need by the lender to:
(a) to see the franchisee put its own money into the business as a way of ensuring its continuing personal commitment, and
(b) to avoid the franchisee having to face too high a burden of debt.
The banks have off-the-shelf, tailor-made packages for specific franchisors they have evaluated, usually those which are well established and in which they have experience of lending to their franchisees. The packages are usually made-up of different types of facilities (term loans, overdraft, equipment leasing, etc.) to suit the particular requirements of each franchise scheme, and they are normally administered through the bank's branch network, under the guidance of the bank's head office franchise department.
The banks emphasise that their normal lending criteria apply to applicants for their packages, and that the existence of a package should not be construed as any form of warranty by the bank of the viability of the franchise. The concept of these comprehensive packages was pioneered in 1981 by NatWest and Barclays.
Block exemption regulation for vertical restraints Some franchise agreements, depending particularly on the market share of the company concerned, can be caught by European competition law, under Article 81(1) of the Treaty of Rome. This block exemption regulation serves to exempt such companies from the competition law so long as they accept certain restrictions, such as avoiding fixed prices. The current 10-year regulation was introduced in June 2000 to succeed an earlier regulation which had run for 10 years. This is a difficult area and advice should be sought from lawyers specialising in EC competition law.
British Franchise Association (BFA) Trade association of franchisors formed in 1977 to promote franchising; raise its ethical standards; overcome the negative attitude to franchising then prevailing as a result of problems with pyramid-selling with which it was confused; and to protect the interests of the industry, particularly with regard to UK and EC legislation. It celebrated its 25th anniversary in 2002. The eight founder franchises were: Budget Rent-a-Car, Dyno-Rod, Holiday Inns, Kentucky Fried Chicken (now KFC), Prontaprint, ServiceMaster, Wimpy International and Ziebart ( a vehicle rustproofing franchise).
British Franchise Association Arbitration Scheme The scheme was introduced by the BFA in 2001 as the major part of a three-tiered dispute handling service offering franchisors and franchisees a choice of arbitration, mediation and conciliation, as an alternative to court action. Unlike an earlier arbitration scheme introduced in 1987 and administered by an outside body (the Institute of Arbitrators), the new scheme is run by the BFA. This has enabled it to be designed to be "franchise friendly" in that it draws on arbitrators who have experience of franchising and are assisted in their deliberations by practising franchisors and franchisees.
Business-format franchise A franchise in which the franchisor provides the franchisee with a complete format (blueprint) for the setting-up and running of the business, hence the name. The type of franchise covered by this directory, as opposed to a franchise, which only involves the granting of specific rights, such as territorial (e.g.TV, radio and train franchises).
Buy-out clause The franchise contract may include a clause giving the franchisee the option to buy itself out of the franchise and continue to trade at the same site and in the same type of business, but as a totally independent business (normally, if it withdrew from the franchise this would not be permitted), without any further obligations to the franchisor. The buy-out price would probably be related to turnover.
Such an option is uncommon because it negates some of the basic advantages of joining a franchise, but those who recommend it feel that the existence of the option provides a reassuring safety valve to applicants who may be concerned about making a long-term commitment to stay in the franchise. A buy-out may mean that a franchisor loses service fee income from a good franchisee, but, on the other hand, it gains from the proceeds of the buy-out and also gets back a territory for resale. The clause provides a good illustration of how franchise contracts can differ, and how they reflect the entrepreneurial ideas of different franchisors.
Company-owned units Units which are owned and operated by the franchisor to give it continual on-the-ground experience of the franchise at the franchisee (operational) level. They also provide it with practical research and development facilities, and a launching platform for new systems and products. For example, franchisees will far more readily invest in a store refit, if it has been proved in company-owned stores that it will stimulate increased trade and profit.
The nucleus of the company-owned units is usually provided by those in which the concept was first developed, although some of these may be sold as established businesses to new franchisees. Conversely, franchisors may buy-back franchised units and convert them to company-owned.
Normally, a franchisor would always retain a number of company-owned units for the above reasons. Some systems set a target of having 10 per cent of their chain as company-owned units.
Competition law As franchise agreements contain restrictive clauses they are caught by the competition laws of both the EU and UK, which are designed to stop restrictive practices, particularly price-fixing. The problem for franchisors has very largely been overcome in the EU by a block exemption regulation, and in the UK by the Restrictive Trade Practices Act, and since January 1998 by the new Competition Act, which is similar to the EU law. Franchisors have, nevertheless, to conform to certain conditions to benefit from the concessions. The regulations are, however, complex and franchisors should seek specialist legal advice.
Disclosure Members of the BFA have an obligation, under rule 3.3 of the EFF code of ethics, to provide “full and accurate written disclosure of all information material to the franchise relationship”, but there is debate over whether such disclosure should be in a standard form. Those who support standard-form disclosure argue that it would be beneficial to franchising as it would make it more transparent that franchisors were disclosing and that by being in a standard format would be more easily understood by the public and consequently enable them to make a more balanced judgment of the quality of the franchise. Those who are opposed believe that standard-form disclosure is unnecessary as franchisors are disclosing and that such a step would place an unwarranted administrative and financial burden on franchisors and could impede franchise sales.
In the U.S., franchisors have by law to provide a disclosure document and many choose to fulfil the obligation by issuing a Uniform Franchise Offering Circular (UFOC) developed by the American Securities Administrators’ Organisation. If franchisors make earnings claims in the media they must also issue a separate earnings claims document. See also Federal Trade Commission Rule on Franchising.
Disenfranchise The withdrawal by the franchisor of the rights granted to the franchisee to operate the franchise. This is likely to occur when the franchisee does not respond to warnings and is persistently in breach of the terms of the franchise contract. Typically, this occurs when it fails to declare or pay the due franchise service fees, or is unable to maintain the quality standards set by the franchisor and through such negligence endangers the reputation of the entire system. See also termination.
Economies of scale This refers to lower buying costs for products/materials due to the buying power of the franchise as a whole. The franchisor, as its chain grows, is in an increasingly stronger position in negotiating special terms with suppliers for the benefit of its franchisees. This is one of the fundamental advantages of the franchise system. The saving on the cost of goods can often equal, or exceed, the amount of the service fee, which the franchisee pays to its franchisor.
Ethical franchise A franchise that conforms to ethical franchise business standards, particularly with regard to the facts it discloses at the outset to potential franchisees. The accepted standards are those set by the industry's trade associations, the EFF and BFA.
European Franchise Federation (EFF) The EFF comprises the national trade associations of franchisors in the different European countries, including the UK body, the BFA. The EFF has offices in Brussels and lobbies the European Commission on behalf of franchising.
Federal Trade Commission (FTC) Rule on Franchising National legislation in the U.S. introduced in 1979 to protect potential franchisees by compelling franchisors to make detailed disclosures about their own personal business backgrounds, their companies, and the terms of their franchise contract. In addition, many individual states in the U.S. have their own registration and disclosure laws, and franchisors offering franchises in their territories must comply in most cases with both national and state legislation.
U.S. franchisors believe that their industry is over-regulated, and that the dual legislation is stifling growth and, in particular, making it difficult for new franchisors to enter the market. To reduce the burden and cost (both in money and time) of compliance, franchisors would like the individual states to drop their own laws in favour of the universal adoption of the FTC's rule.
The rule was relaxed in July 2007, making it less burdensome legally for UK franchisors to enter the U.S. market (see Franchise World, April 2007).
Fixed service fee The franchisor may chooseto get its continuing income from the franchisee through a fixed monthly payment, or a turnover-based service fee with a minimum payment. Such arrangements are criticised for removing the element of partnership in which the two parties share the risks. However, fixed service fees do offer a financial advantage to the more successful franchisees as their fees are, in effect, capped.
Flawed contract A franchise contract between franchisee and franchisor which deviates in one or more clauses from terms which are acknowledged as industry standards. Such a contract, for example, may not give the franchisee the opportunity to renew at the end of the term.
Fractional franchise A franchised unit set-up inside the premises of a larger business, instead of being a stand-alone unit (also described as co-habiting). The franchise might be structured in this way for several reasons.
- The product/service might not warrant a large enough operation to justify its own premises.
- The unit might only be profitable if the bulk of the overheads are met by the other business.
- The unit might draw some of its customers from those of the host business.
- The unit might be compatible with the main business, e.g. a car hire franchise within a motor dealer’s showroom.
Franchise consultants They provide advice to companies as to whether they are suitable for franchising (franchiseable) and guide them into the business. Also, they assist established franchisors to review and develop their concepts. The most experienced franchise consultants have hadmanagement experience within a number of different types of franchises operating in a range of business categories.
Franchise contract This is the contract between the franchisor and franchisee and it should describe in detail and unambiguously the terms of the agreement, including the rights and obligations of both parties. The franchisee should seek professional advice from its own solicitor to help it evaluate the terms of the contract and it should fully understand all its clauses before signing that it agrees to be bound by them.
The contract is usually not negotiable by the prospective franchisee as one of the fundamental strengths of a franchise is an across-the-board uniformity in which all franchisees are treated alike, with no individuals having the benefit of specially-negotiated, favoured concessions from the franchisor.
As a well-drafted franchise contract is written specifically to meet the requirements of a particular franchisor and its unique franchise system, they differ from franchise to franchise. Generally, a weak, loosely-written contract indicates an inadequate franchisor, whereas a strong contract is a sign of an experienced and competent franchisor for the fundamental reason that it is only through the terms of the contract that it can maintain discipline and standards in the franchise for the benefit of everyone within its network. Franchise contracts should be judged not just on what they contain, but also on what they omit.
Franchise fee (continuing management services fee) A fee based on a percentage of sales turnover is the more popular of the two main avenues by which the franchisor gets its continuing income from its franchisees. The other method is through a mark-up on the products/materials it supplies.
The fee system based on turnover is one of the fundamental elements in the franchise concept because it means that the franchisor can only succeed if it can ensure that its franchisees succeed. It is this continuing commitment by the franchisor to the success of its franchisees that lies at the heart of the franchising concept.
There is no standard percentage for the fee, and they differ considerably between franchises. They should reflect the level of service provided by the franchisor and, of course, represent value for money. See also: royalties, fixed franchise service fee, product/materials mark-up, and advertising levy.
Franchise fee (initial) This term is used in different ways and can cause confusion, particularly when making a value comparison of the price of buying into different franchises. Some franchisors use the term to cover the whole of the start-up costs that franchisees have to meet to join the franchise and set-up in business. Others use the term merely to cover the fee they charge for the right to use their name, trade marks, copyright materials, etc., and for training and goodwill. Therefore, the fee charged by franchisors can vary dramatically, depending in which context it is used and the value of what it is that the franchisor is providing.
Taken in its widest sense, the franchise fee (less the tangible bought-in items, such as shopfitting and equipment, which it may contain) should cover part, or the whole of the costs incurred by the franchisor in getting its franchisee into business (chiefly recruitment, training, operations manuals, launch promotion).
The ethical franchisor does not look for a profit from its initial franchise fee. It is, in fact, a sign of long-term weakness in a franchise if, due to inadequate receipts from continuing management services fees, the franchisor has to rely for a large proportion of its income on initial franchise fees. This is because, as the franchise grows, the proceeds from initial fees declines as there are increasingly fewer territories remaining available for sale. Also referred to as the front-end fee, or up-front fee.
Franchiseable Capable of being franchised, e.g. a fast-food operation in which the expertise to set-up and run the business system can be easily passed to others through a short period of training and operations manuals. In contrast, a business that requires a high degree of personal skill or training would not generally be regarded as franchiseable. Also, neither would a business in which the profit margins are too low to allow both parties to enjoy worthwhile levels of profitability. Usually spelt with an 'e' as in 'manageable'.
Franchisee The person, or company, who buys a franchise from the franchisor. Also, referred to as a licensee, or franchise owner. Although franchisees are usually individuals, they can be companies, partnerships or major international firms. In the latter case, franchisors traditionally accustomed to granting their rights to individuals, can encounter difficulties over the accountability of people within a large corporate organisation for the well-being of the franchise, particularly if the corporate franchisee regularly changes its management and occasionally ownership.
Franchisee association/advisory council An organisation of franchisees within an individual franchising company. At best, it can be a positive force working in close collaboration with the franchisor and drawing upon the experience of the franchisees in the field to help in the development of the franchise. At worst, it is a “trade union” of franchisees formed during a period of conflict to do battle with the franchisor (one such U.S. association was called, The Store Owners Action Committee). For this reason, franchisors are recommended to encourage the formation of franchisee associations during a successful period in the lifecycle of the franchise when relations between the two parties can be fruitfully developed, rather than allow the association to be born out of unrest and dissatisfaction.
In the U.S., in addition to franchisee associations representing franchisees in a specific franchise, there is a national body representing franchisees in different franchise systems. The IFA, the U.S. franchise trade association, has itself a category of membership for franchisees and some of its presidents have even come from this category.
Franchisor The franchisor company which sells franchises in its system to franchisees. The ethical franchisor will have proved the success of its concept and its ability to pass its operating system to others by running pilot units before offering franchises for sale.
Through franchising, the franchisor has the opportunity to become a national, or an international company, without having to find the capital to finance the setting-up of a company-owned branch network with the attendant management costs. The franchisees provide their own capital and as they own their businesses are self-motivating. In choosing the franchising route, the franchisor company, however, surrenders some of the control over its own business, and the opportunity to make larger profits by owning its own branches.
Front-end fee See franchise fee (initial).
Intellectual property rights Trade marks, service marks, know-how, and copyright. These form the basis of the franchise system.
International Franchise Association (IFA) The Washington-based U.S. franchise trade association. The largest franchising trade body in the world. Its annual convention held early in the year in the U.S. is the major world event in the calendar. The IFA has provided the model for the national trade associations of franchisors in countries around the world, including the UK back in 1977.
Job franchise A franchise which creates a job for the franchisee as opposed to a “business”. Usually, a low-cost franchise (under £15,000) and typically a one-man van operation.
Joint venture A joint venture is a popular way for a franchisor to introduce its franchise into a new country. The joint venture partners (not necessarily equal) are the franchisor and an individual/company in the new country. The advantages are that development costs are shared, the franchisor retains considerable control, and local people are involved.
Many such arrangements, however, run into difficulties because neither party has total commitment, or total control, and ultimately one of the parties ends up buying out the other. Generally, the utright sale of master franchises has proved a better alternative. See also master franchisee.
Lease franchise The franchisor leases the premises to the franchisee at a rental, based on turnover, which also covers the management ervices fee.
Loan Guarantee Scheme Under the Loan Guarantee Scheme, the government guarantees to the bank a large percentage of a business loan in return for a premium paid by the borrower. Applicants must have exhausted normal borrowing channels. Details from the banks.
Management services fee See franchise fee (continuing management services fee)
Marketing/advertising levy A percentage of turnover (usually additional to the management services fee) collected by the franchisor to be spent exclusively in marketing and promoting the product/ service to the customer. Usually, the franchisor is accountable to its franchisees, through an independent auditor, for how it spends the money.
Franchisees may also voluntarily agree to supplementary levies to provide extra campaign money, and they may get together on a regional basis and organise a separate levy to provide money for additional campaigns in their own areas.
A levy could also be made for purposes other than advertising. For example, a retail computer franchise had a separate levy for software development.
Master franchisee Franchisors sell master franchises to operate their systems in other countries. Thus the UK master franchisee of an American system would operate the franchise in the UK, and act as the UK franchisor, selling franchises and providing all the necessary services to its franchisees in the normal way. Usually, the master franchisee will remit a percentage of the initial fees and royalties it receives from its franchisees to the parent franchisor.
The master franchise operation might also be a joint venture between the parent franchisor and a company/ individual in the new country in which both have invested capital and share the profits.
Multi-level and network marketing A form of direct selling usually with different tiers or levels of distributorship. Pitfalls to avoid are a heavy front-end product loading, fixed payment schemes, a tiered commission structure which makes the product un-competitive in the marketplace, and a system in which the participants rely for their income on the sale of the different levels of distributorship, rather than the sale of products. See also pyramid selling.
Multi-unit franchisee A franchisee with more than one unit. Such franchisees are usually a sign of a successful and mature franchise because they have demonstrated their confidence in the system by opening other units.
Additional franchises (extra territories) may be used by franchisors as incentives. Potential franchisees may be offered options on other territories as an inducement to join the franchise. Existing franchisees may be offered further franchises as n incentive, or reward for reaching performance targets at their original units. In the latter case, the advantages to the franchisor are lower recruitment and training costs, and the opening of additional units by their own experienced franchisees who are known to be capable of meeting performance standards. Multi-unit franchisees can cause problems for the franchisor if they become too large and powerful, and some franchisors, therefore, restrict the number of franchises that a franchisee may hold in its system.
National Franchisee Forum The forum was originally launched by the BFA in 1997, but failed to attract sufficient numbers of franchisees into membership and was subsequently relaunched in 2002 in a different format. The new forum is made up of 11 franchisees from the systems of the 11 franchisors elected to the BFA board. Its objective is to provide franchisees with the opportunity to contribute to debate on the conduct and development of the industry. The forum does not deal with conflicts involving specific franchise systems or individual franchisees.
Operations manuals Manuals supplied by the franchisor as part of the franchise package to provide the franchisee with step-by-step instructions (the business format) on how to set-up and operate a franchised unit to the correct specification and tandards of the franchise. The manuals are the copyright of the franchisor and in this respect are valuable to it in protecting its system from being copied.
Party-plan selling A form of direct selling to the public through “parties” in their homes.
Pilot unit A unit run by the franchisor at rm's length from its company-owned outlets to demonstrate that its concept is viable as a franchise, and that the know-how can be transferred successfully to an inexperienced newcomer. The pilot unit is the ultimate test-bed for the franchisor's training methods and operations manuals.
Product/materials mark-up One of the two traditional avenues by which the franchisor gets its continuing income from its franchisees. The other avenue, a management services fee based on gross turnover, is generally accepted as a more satisfactory arrangement, as it is more transparent and not open to opportunities for abuse by manipulating prices and mark-ups. See also: royalties.
Pronuptia case (The) A West German court case that reached the European Court of Justice and raised questions over the legality of the clauses in a franchise contract, particularly those concerned with the granting of exclusive territorial rights to franchisees. The point at issue was the conflict between the franchise agreement, with its restrictive clauses, and EC competition law. The case led to a complex judgment by the European Court in January, 1986, and a policy statement by the EC in March, 1986. The outcome was the introduction by the EC of a franchise block exemption regulation that freed franchising from many of the constraints of EC competition law. The Pronuptia case is so called because it involved a franchisee of Pronuptia bridal wear, who was sued by her franchisor for non-payment of franchise services fees. The franchise-specific block exemption regulation was superseded in June, 2000, by a wider regulation, the EC Block Exemption Regulation on Vertical Restraints (see relevant appendix).
Pyramid selling A term applied to multi-level marketing because of the different tiers in the distributive structure. The emphasis can be on selling the tiered territories, rather than the sale of the product. The Trading Schemes Act 1996 was introduced to provide wider control over pyramid selling and similar trading schemes. See also Trading Schemes Act 1996.
Racking scheme A product distribution system in which the franchisee, or the franchisor on its behalf, sites merchandising display units usually in a variety of different types of retail outlet. The franchisee visits the units at regular intervals to replenish stock and collect payment from the retailer for the stock that has been sold. The initial franchise package often includes a specified number of merchandising units which have been pre-sited by the franchisor. The system gives the franchisee access to retail sites without having to meet normal retailing overheads. The advantage to the retailer is that the system provides it with an additional product line without it having to buy stock or display units. The retailer only pays for what it has sold.
Regional master franchise A sub-franchising arrangement which gives the holder the right to operate franchise units and sell franchises within a given territory, such as the Midlands, the North-East, etc. As it creates an extra tier, care needs to be taken to avoid the anti-pyramid legislation. This structure is popular in America because it helps to overcome the problems caused by the size of the country and the market differences across the country, but there are fewer examples in the relatively compact UK.
Renewal Franchise contracts are normally granted by the franchisor for a specific period (usually 5 -10 years), but include an option for the franchisee to renew for further periods on condition that it is not in breach of the contract.
The option to renew is a basic element of business- format franchising because it ensures the continuity of the franchisee's business and gives it the opportunity to build up a valuable asset, which it can sell (subject to the franchisor's approval of the buyer).
Renewal is usually without charge, but the franchisee is likely to have to renew, not on the terms of its original contract, but on those of the contract being offered at the time of renewal, which in the light of the development of the franchise may contain more stringent clauses, and would certainly include any increases in the continuing service fee, etc. See also: annual renewal fee.
Resales Franchises offered for sale by franchisees who wish to leave their network for whatever reason, typically retirement, illness, the wish to move into another type of business, or simply to realise a capital gain on the investment in time and money they have put into their business. Some networks are sold out and only have resales available. Purchasers of resales should ideally be offered the same duration terms as start-up franchises. This can be vital to those seeking loans to buy the business.
Royalties An alternative term for management services fees (fees based on the franchisee’s turnover, net of VAT).
Service mark Similar to trade mark, but applicable to services, rather than products. The granting by the franchisor to the franchisee of the rights to use its service marks, trade marks and copyright materials (operations manuals, etc.) is a basic element of the franchise package. One of the important obligations of the franchisor is to prevent its marks from being used by unauthorised persons in order to protect the interests both of itself and its franchisees, who in their franchise fees have paid for the right to use the marks. In a mature franchise, the marks carry considerable goodwill and provide instant public recognition for the business of the new franchisees.
There are laws to protect service marks which are similar to those for trade marks. Franchisors may also protect their services marks by taking legal action against the transgressor for passing off.
Soft franchise A scheme in which the “franchisee” (usually a branch manager) does not make any cash investment in the business, but takes a proportion of the profit. A half-way stage to franchising, which contains elements of franchising, profit sharing, management development, and employee motivation. The “franchisor” passes the responsibility for some of the running costs of the unit to the “franchisee”, who as a result can to some extent control its unit's expenditure and thus increase profits and its own income.
Standard-form disclosure See disclosure.
Sub-franchises Sub-franchises are franchises granted within the territory of an existing franchisee. As this can, in effect, create a tiered structure, there is a danger that it can be trapped by the anti-pyramid selling legislation. Some franchisors have sought to avoid this difficulty by constructing their systems so that they, rather than their franchisees, sell and grant the franchises to the sub-franchisees. However, such arrangements need to be structured by an experienced franchise lawyer.
System-wide or network turnover The sales turnover of the entire franchised network, as opposed to that of the franchisor company. The turnover viewed as if the entire network was company-owned. For example, in a network of 50 shops (average turnover per annum £80,000, franchise service fee 8 per cent), the system-wide turnover would be £4 million, and the franchisor's turnover would be £320,000. In addition, the franchisor would be expected to have further income from other sources, such as initial franchise fees (if the network is still growing), fees from resales, company-owned units, and possibly fees from overseas master franchisees. It may also have income from leasing property, vehicles or equipment to franchisees, and commission from suppliers to the network.
System leasing This is an attractive alternative description for franchising coined by a UK pioneer of the business, Moshe Gerstenhaber, the founder of Kall-Kwik. The franchisor is the system lessor and the franchisee, the lessee. Gerstenhaber believes that the term conveys a better understanding of business-format franchising because the franchisor, in fact, leases to the franchisee a proven business system for a specified period in return for up-front and on-going fees.
Technology transfer The transfer of know-how from one entity to another. A basic feature of the franchise system. The franchisor transfers to its franchisee by training (usually at head office and on site) and through operations manuals, the know-how to set-up and operate its individual unit in the ormat of the franchise.
Termination It is important for the franchisee to understand the implications of the franchise contract being terminated, prior to its expiration, either by its own actions, or those of the franchisor. If the franchisee walks away from the business, for example, is the franchisor likely to sue for the royalties it could have expected to draw during the unexpired term of the contract? If the business is successful, how easy is it for the franchisor, particularly in a franchised based on a property lease, to repossess the business before the expiration of the franchise contract? A responsible franchisor would give a franchisee the opportunity to put right any breach of the contract, and only resort to termination for a serious breach, such as the franchisee setting-up a competing business, or consistently failing to pay royalties. See also disenfranchise.
Trading Schemes Act 1996 This Act was introduced to widen control over pyramid selling and similar trading schemes. As franchising would have been caught by the Act and consequently been unworkable (franchisees, for example, would have been allowed to leave their network without penalty by giving 14 days notice), the government excluded from the Act single-tier schemes, such as a typical franchise, and schemes in which all the participants are registered for VAT. This means that any ranchise structure with more than one tier (e.g. a typical regional master franchise scheme) would need to rely on the VAT exclusion provision to avoid the Act.
Turnkey operation A franchise in which the franchised unit is completely fitted out, equipped and stocked for the franchisee, ready for opening day. A term often applied to retail-type franchises. The franchisee (assuming that it has been trained by the franchisor at head office, or in other units) can open for business on its first day literally by turning the key.
Unfair Terms in Contracts Bill The government is proposing to introduce an Unfair Terms in Contracts Bill which would be applicable to franchisees with less than 10 employees and having an agreement with a contract value (tied supplies, royalties, advertising levies, etc) of less than £500,000 over the term of the contract. As franchise contracts are drafted on behalf of franchisors and unlikely to be negotiable by franchisees, the proposed bill would give qualifying franchisees new teeth in any disputes with their franchisor. According to some observers, the bill would bring about a major change in the way British franchise contracts are written and could substantially tip the balance of power in favour of franchisees.
Uniform Franchise Offering Circular (UFOC) Franchisors offering franchises in the U.S. have by law to supply this disclosure document to potential franchisees prior to the signing of any contract, or making any payment. A lengthy document, it has 23 sections ranging from the franchisor's business experience and the franchise fees it charges to any restrictions it places on where its franchisees are permitted to purchase the products or services they require to operate the franchise, and any restrictions on what they may sell. The UFOC regulations are controlled by the Federal Trade Commision. There is no such legislation in the UK and although it might be appreciated by potential franchisees it would generally be opposed by franchisors, who would see it as unwelcome interference by government. They believe it to be unnecessary, in the absence of any widespread abuse of the franchise system, and that it would be time-consuming and costly for them to implement and keep updated. The BFA's position is that it adequately covers this ground through its requirement for its franchisor members to disclose all relevant matters to potential franchisees. For further information and the availability of reports, visit www.researchandmarkets.com
© 2008 Franchise World
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