In franchising, the right legal team matters. So does the right business term. Franchising concepts and words are used interchangeably, but anyone considering entering this exciting area of business should be able to distinguish and contextualize these terms.
Let’s review some of the finer points of commonly used franchise terms, as they can help you save face in conversations and protect you during negotiations.
What Is The Difference Between a Franchisor and a Franchisee?
Most franchise units are independently owned, though they operate under the same brand name and use the same method of operation. A brief list of definitions and examples can help clarify “who is who” in the franchise relationship.
Franchising is a strategy for business expansion whereby one party licenses its trademark or brand name and method of business operation to another party, who uses that name and method in the operation of its business.
A franchisor is an individual or company that sells or grants a franchise for the sale of goods or services. Some franchisors own and operate a majority of their locations. Texas Roadhouse Inc., for example, operates 573 of its 625+ restaurant locations (according to the Q3 2023 report). But this is the exception rather than the rule.
A franchisee is an independent person or business entity that purchases the rights from the franchisor to own and operate a franchise at a specific location. Some of the largest franchise systems in the world have franchisees to thank for their success, including Burger King, McDonald’s, 7-11 and Retro Fitness.
A franchise generally refers to the business that the franchisee operates.
An Area Developer or Multi-Unit Operator is a franchisee that acquires the right to develop more than one franchise location. These sophisticated investors are often attracted to multi-unit franchising which can provide increased opportunity for faster growth, greater revenue potential and economies of scale. Read more here.
Additional Key Franchising Terms
Federal Trade Commission (FTC). The FTC is the government agency tasked with “protecting the public from deceptive or unfair business practices and from unfair methods of competition through law enforcement, advocacy, research, and education.”
The FTC is the only federal agency with both consumer protection and competition jurisdiction in broad sectors of the economy. As indicated on its website, the FTC, “pursues vigorous and effective law enforcement and advances consumers’ interests by sharing its expertise with federal and state legislatures and U.S. and international government agencies.”
You may have heard of the FTC Franchise Rule, which establishes federal policies in franchising and gives prospective franchisees the material information needed to weigh the risks and benefits of the investment.
Franchise Disclosure Document (FDD). The FDD contains information about the franchisor and the franchise system. The FTC (and various state regulators) require franchisors to provide the FDD to potential franchisees to help them make an informed decision about whether to buy the franchise. The FDD outlines the essential business terms between the franchisor and franchisee, including fees, territories, initial investment requirements, training and support, and other provisions.
Franchise Agreement. Once a franchisee is ready to join the system, the parties will sign a contract commonly referred to as the franchise agreement, which sets forth the terms governing the relationship between the franchisor and franchisee. This franchise agreement identifies the parties’ rights and obligations during the franchisee’s ownership and operation of the franchise. This agreement also describes certain post-termination rights and obligations.
Knowing and understanding these terms will provide basic knowledge, but we’re just scratching the surface. Whether you are considering expanding your brand through franchising or are acquiring a single location or a multi-store, geographically dispersed franchise operation, you should hire a qualified NY franchise lawyer before you sign a contract.
Contact Lusthaus Law
Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation.