Wednesday, November 16, 2011

What are franchisees and contractually where do they stand?

I had a comment left on a prior post asking be to address franchisees, so here it is.

A franchisee is an independent company that has an agreement with a company (the Franchisor) that will include many things. As a franchisee is licensed to use the Franchisor’s name and logos in the operation of their franchise, the company will have many controls in their agreement about what the franchisee can or can’t do. There can be requirements on the purchase of goods, and services from the Franchisor. They may be required to purchase certain services from the Franchisor or participate in regional or country-wide programs or advertising campaigns run by the Franchisor. The franchisee as part of the agreement may be granted exclusive rights to certain locations, areas, or even countries. The franchisee paid the Franchisor a fee to purchase those franchise rights. They may make additional payment similar to royalty fees based on their performance and sales and they will pay for any products or services the Franchisor requires them to purchase. As long as the franchisee operates their business in accordance with their agreement they get the rights to continue to operate the business and use the Franchisor's name. If they breach their agreement, the Franchisor could stop selling the what they need to operate and seek an injunction against their using the Franchisor’s name or brand in the future.

From a contractual perspective, the Franchisor has no ownership interest in the Franchisee. There could be a financing agreement between the two companies where the Franchisor would be a secured creditor, but any ownership interest in a franchisee by the Franchisor is not common. A franchisor may operate their own locations and when they do those would be subsidiaries. A franchisor could potentially repurchase the franchise rights with the intent of operating it as a subsidiary or reselling the franchise rights to a third party. Any rights to repurchase would either need to be included in the agreement or would require mutual agreement.

Since the franchisee is an independent company, the Franchisor has no liability for the franchisee. If the Franchisor, as part of the sale of goods or services to the franchisee, provided warranties or indemnities that the franchisee could pass on to their customers, a customer could enforce those. Barring that the only liability that a Franchisor could have would be tort liability claims for personal or property damage that was caused by the Franchisor’s product.

This means that a franchisee from a contracts standpoint would be equivalent to a minority owned subsidiary or an affiliate that the company did not have control over with one difference.
In both the minority owned subsidiary or affiliate lacking control the Company would still
lose based upon their ownership share in those companies and that would effect the profits they could return to the company. In a franchisee situation, unless it’s a product liability clam, all losses and damages would be borne by the franchisee.

From a sourcing perspective this means that even though they may have the franchisor’s name on their business, for anything other than product liability you could only look to the franchisee and you should qualify them as a compete separate company before buying from them.

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