WRITE 2-3 PARAGRAPHS FOR YOUR RESPONSE. EACH PARAGRAPH SHOULD HAVE AT LEAST 5 SENTENCES: Your Comments/Thoughts For Information Below 19-5 Franchises Instead of setting up a completely independent business, many entrepreneurs opt to purchase a franchise. A franchise is an arrangement in which the owner of intellectual property such as a trademark, a trade name, or a copyright-licenses others to use it in the selling of goods or services. A franchisee (a purchaser of a franchise) is generally legally independent of the franchisor (the seller of the franchise). At the same time, the franchisee is economically dependent on the franchisor's integrated business system. In other words, a franchisee can operate as an independent businessperson and choose any business form but still obtain the advantages of a regional or national organization Today, franchising companies and their franchisees account for a significant portion of all retail sales in this country. Well-known franchises include McDonald's, 7-Eleven, and Holiday Inn. Franchising has also become a popular way for businesses to expand their operations internationally 19-5a Types of Franchises Many different kinds of businesses now sell franchises, and numerous types of franchises are available. Generally, though, franchises fall into one of three classifications: distributorships, chain-style business operations, or manufacturing or processing-plant arrangements. In a distributorship, a manufacturer (the franchisor) licenses a dealer (the franchisce) to sell its product. Often, a distributorship covers an exclusive territory. EXAMPLE 19.12 Black Snow Beer Company distributes its beer brands through a network of authorized wholesale distrib- utors, each with an assigned territory. Marik signs a distributorship contract for the area from Gainesville to Ocala, Florida. If the contract states that Marik is the exclusive distributor in that area, then no other franchisee may distribute Black Snow beer in that region. In a chain-style business operation, a franchise operates under a franchisor's trade name and is identified as a member of a select group of dealers that engage in the franchisor's business. The franchisee is generally required to follow standardized or prescribed methods of opera- tion. In addition, the franchisee may be required to obtain materials and supplies exclusively from the franchisor. McDonald's and most other fast-food chains are examples of chain-style franchises. This type of franchise is also common in service-related businesses, including real estate brokerage firms such as Century 21 and tax-preparing services such as H&R Block, Inc. In a manufacturing or processing plant arrangement, the franchisor transmits to the franchisee the essential ingredients or formula to make a particular product. The franchisee then mar- kets the product either at wholesale or at retail in accordance with the franchisor's standards. Examples of this type of franchise are Pepsi-Cola and other soft-drink bottling companies. 19-5b Laws Governing Franchising Because a franchise relationship is primarily a contractual relationship, it is governed by con- tract law. If the franchise exists primarily for the sale of products manufactured by the fran- chisor, the law governing sales contracts as expressed in Article 2 of the Uniform Commercial Code applies. Additionally, the federal government and most states have enacted laws governing certain aspects of franchising Generally, these laws are designed to protect prospective franchisees from dishonest franchisors and to prohibit franchisors from terminating franchises without good cause. Federal Regulation of Franchising The federal government regulates franchising through laws that apply to specific industries, such as automobile dealerships and service stations, and through the Franchise Rule, created by the Federal Trade Commission (FTC). The FTCS Franchise Rule requires franchisors to disclose certain material facts that a prospective fran- chisee needs in order to make an informed decision concerning the purchase of a franchise. Those who violate the Franchise Rule are subject to substantial civil penalties, and the FTC can sue on behalf of injured parties to recover damages. The rule requires the franchisor to make numerous written disclosures to prospective fran- chisees. All representations made to a prospective franchisee must have a reasonable basis. For instance, if a franchisor provides projected earnings figures, the franchisor must indicate whether the figures are based on actual data or hypothetical examples. If a franchisor makes sales or earnings projections based on actual data for a specific franchise location, the fran- chisor must disclose the number and percentage of its existing franchises that have achieved this result. State Regulation of Franchising State legislation varies but generally is aimed at protecting franchisees from unfair practices and bad faith terminations by franchisors. A number of states have laws similar to the federal rules requiring franchisors to provide presale disclosures to prospective franchisees. Many state laws also require that a disclosure document (known as the Franchise Disclo- sure Document, or FDD) be registered or filed with a state official. A state law may require the disclosure of information such as the actual costs of operation, recurring expenses, and profits earned, along with data substantiating these figures. State deceptive trade practices acts may also apply and may prohibit certain actions on the part of franchisors. To prevent arbitrary or bad faith terminations, state law may prohibit termination with out "good cause" or require that certain procedures be followed in terminating a franchising relationship