What is a Franchise?

By Tonya Mah

Franchising is a method of distributing products or services involving a franchisor, who establishes the trademark associated with the products or services and grants to a franchisee, the right for, a specified duration and maybe within a specific geographical area, to distribute the franchisor’s products or services.  The franchisee is required to make a payment or continuing payments to the franchisor in connection with the rights granted to the franchisee by the franchisor.

There are two different franchising formats:

1. The most commonly thought of franchise is the business format franchise.Generally in business format franchises, franchisees distribute the franchisor’s products or services in accordance with the franchisor’s mandatory business system and using the franchisor’s trademark.Examples of business format franchises are: McDonald’s, Tim Hortons and Subway.

    

2. The other franchise format is, product distribution format.Generally in product distribution format franchises, the franchisor grants the franchisee the right to distribute products or services and the franchisor provides location assistance to the franchisee but the franchisee determines how to operate its business.That is, the franchisee has significantly more freedom and responsibility in operating its business with product distribution format franchises.Examples of product distribution format franchisees are: automobile and farm equipment dealerships and gas stations.

Understanding franchise law is crucial for both franchisors, franchisees and prospective franchisees. The complexities of franchise agreements, disclosure requirements, and regulatory compliance demand careful consideration and expert guidance. By staying informed about the key aspects of franchise law, businesses can navigate the legal landscape more effectively, ensuring that their franchise operations are both legally sound and successful. For anyone involved in the franchise industry, remaining updated on legal developments and seeking professional advice can make a significant difference in achieving long-term success.

The application and outcome in franchise law is very fact specific, please contact Tonya Mah (tmah@sorbaralaw.com) should you have any questions or wish to obtain legal advice for your franchise, prospective franchise or franchisor.