In my last blog I addressed how the law determines if a business qualifies as a franchise.  Here are other pitfalls that face the unwary.

2. One key to determining the character of the relationship is the independence of the two enterprises. In the eyes of the law, the contractual arrangements between franchisors and franchisees make the latter dependent upon the former. Franchisees sell or distribute the trademarked products or services of franchisors, usually in exclusive territories—that is, territories in which the franchisor will not permit other franchisees to operate. They also rely on franchisors for advice, training, and advertising and marketing assistance. In some cases, franchisors may serve as exclusive suppliers of the products or services sold by its franchisees.

3. Licensing and distributorship or dealership arrangements, on the other hand, are relationships between independent companies, each operating under its own trade name, and each largely uninvolved in the operation of the other. Thus, under typical licensing arrangements, one company permits another to sell its products or services in exchange for a percentage of the proceeds, with no other involvement in the affairs of the other company. Under typical dealership or distributorship arrangements, a company operating under its own name undertakes only to buy the products or services of another at wholesale prices for purposes of resale, once again with minimal involvement of either company in the affairs of the other.

Next week we’ll explore additional legal issues facing franchisors and franchisees.


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