International Law

Franchising and Proven Systems

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The franchisor trade association, the IFA, has an unintentionally ironic story on business format franchising.

"WHAT IS "BUSINESS FORMAT" FRANCHISING?

In business format franchising, the franchisor prescribes for the franchisee a complete plan, or format, for managing and operating the establishment. 

The plan provides step-by-step procedures for major aspects of the business and, anticipating most management problems, provides a complete matrix for management decisions confronted by the franchisees. 

The major advantage of buying a business format franchise is that the "system," the means for distributing goods and or services, has been developed, tested, and associated with the trademark. 

As a result, rapid expansion of a successful retail concept can occur more quickly than through company-owned expansion.*

Sales by business format franchisors continued to increase steadily throughout the 1990s and into the 21st century.  In 2001, comparing business format franchising to product distribution franchising, business format franchising had about 4.3 times as many establishments, employed 4 times as many workers, generated 2.5 times the payroll, and produced nearly 3 times as much output.

*Dave Thomas and Michael Seid, Franchising for Dummies 13 (IDG Books Worldwide, Inc. 2000)."

This would be the same Michael Seid who recently testified as an expert, according to Janet Sparks writing in the Franchising Times:

"Michael Seid states in his documents that he knows of "no legal or industry requirement that a franchise opportunity must be tested in any particular manner, or that a franchisor cannot sell a franchise opportunity until it has been proven by prior franchisees."

He writes that the Federal Trade Commission and state regulators have not established a franchisor "Duty of Competence." Instead, he states, they require franchisors to disclose accurately their experience and history, whatever that may be."

Good to know that franchisor experts from the IFA don't believe that franchisors actually have any legal duty to be competent, or test their business format franchises.

Full post as published by Misleading Advertising Law on December 08, 2008 (boomark / email).