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BUSINESS LAW Today STANDARD EDITION TEXT & SUMMARIZED CASES, 12e

Roger LeRoy Miller

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Sole Proprietorships and Franchises

Chapter 30

Chapter Outline

30-1 Sole Proprietorships

30-2 Franchises

30-3 The Franchise Contract

30-4 Franchise Termination

Learning Objectives

What advantages and disadvantages are associated with the sole proprietorship?

What are the basic requirements of the Franchise Rule, and why?

What might happen if a franchisor exercises too much control over the operations of a franchise?

When will a court decide that a franchisor has wrongfully terminated a franchise?

30-1 Sole Proprietorships (slide 1 of 2)

30-1a Advantages of the Sole Proprietorship

Pays only personal income taxes on the business’s profit

Can make any decision she or he wishes concerning the business

30-1 Sole Proprietorships (slide 2 of 2)

30-1b Disadvantages of the Sole Proprietorship

A sole proprietor bears the burden of any losses or liabilities in the business.

Case Example 30.1 Quality Car & Truck Leasing, Inc. v. Sark (2013)

Personal Assets at Risk

Creditors can go after personal assets to satisfy business debts.

Lack of Continuity and Limited Ability to Raise Capital

30-2 Franchises

A franchise is an arrangement in which the owner of intellectual property 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).

30-2a Types of Franchises

Distributorship

The franchisor licenses a dealer (the franchisee) to sell its product.

30-2a Types of Franchises

Chain-Style Business Operation

A franchise operates under a franchisor’s trade name and is a member of a select group of dealers that engage in the franchisor’s business.

Manufacturing or Processing-Plant Arrangement

The franchisor transmits to the franchisee the essential ingredients or formula to make a particular product.

30-2b Laws Governing Franchising (slide 1 of 2)

Franchise relationships are governed by contract law.

Federal Regulation of Franchising

Industry-Specific Standards

The Franchise Rule

State Regulation of Franchising

State Disclosures

Requirements for Termination

Case Example 30.4 FMS, Inc. v. Volvo Construction Equipment North America, Inc. (2009)

30-2b Laws Governing Franchising (slide 2 of 2)

Exhibit 30–1 The FTC’s Franchise Rule Requirements

REQUIREMENTS	EXPLANATION
Written (or electronic) disclosures	The franchisor must make numerous disclosures, such as the range of goods and services included, as well as the value and estimated profitability of the franchise. Disclosures can be delivered on paper or electronically. Prospective franchisees must be able to download or save any electronic disclosure documents.
Reasonable basis for any representations	To prevent deception, all representations made to a prospective franchisee must have a reasonable basis at the time they are made.
Projected earnings figures	If a franchisor provides projected earnings figures, the franchisor must indicate whether the figures are based on actual data or hypothetical examples. The Franchise Rule does not require franchisors to provide potential earnings figures, however.
Actual data	If a franchisor makes sales or earnings projections based on actual data for a specific franchise location, the franchisor must disclose the number and percentage of its existing franchises that have achieved this result.
Explanation of terms	Franchisors are required to explain termination, cancellation, and renewal provisions of the franchise contract to potential franchisees before the agreement is signed.

30-3 The Franchise Contract (slide 1 of 2)

30-3a Payment for the Franchise

Franchisee normally pays an initial fee or lump sum for the franchise license.

30-3b Business Premises

The franchise agreement may specify whether the business premises must be leased or purchased.

30-3c Location of the Franchise

The franchisor typically determines the territory to be served.

30-3 The Franchise Contract (slide 2 of 2)

30-3d Quality Control by the Franchisor

Means of Control: The franchisor often establishes certain standards for the facility.

Degree of Control: A franchisor who exercises too much control over its franchisees’ operations risks potential liability.

30-3e Pricing Arrangements

Franchisees may have to purchase certain supplies from the franchisor, but franchisees set the prices at which they will resell goods.

30-4 Franchise Termination

30-4a Grounds for Termination

Notice Requirements

Opportunity to Cure a Breach

Case Example 30.7 7-Eleven, Inc. v. Upadhyaya (2013)

30-4b Wrongful Termination

30-4c The Importance of Good Faith and Fair Dealing

Courts generally try to balance the rights of both parties.

Spotlight on Holiday Inns: Case 30.3

Holiday Inn Franchising, Inc. v. Hotel Associates, Inc. (2011)

Why should House and HAI have been advised of Holiday Inn’s plan to grant a franchise to a different hotel in their territory?

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