An Introduction to Business Format Franchises

Wednesday, January 9, 2013

Article Written By: Katie Farrell, Staff Writer

Buying a franchise is a serious investment. If you are considering a franchise purchase, it’s very important that you learn as much as you can about the many issues facing you. Many franchises are successful because the system creates a certain synergy. Businesses brought together under one trademark can achieve things not possible for individual business people, such as group advertising and buying power. However, along with success comes a certain number of failures and risks. As a result, it is imperative to get informed and know your legal rights.

Types of Franchises

There are three basic types of franchises:

  • Distributorships, which grant the right to sell their parent company's product(s) such as auto dealerships such as Toyota, Ford, GM, Mercedes, etc.
  • Trademark or brand name licensing, which gives the licensees the right to use the parent company's trademark or brand in conjunction with the operation of their own business. For example, beverages such as Coca-Cola and sport franchises such as Miami Dolphins and the New York Yankees.
  • Business format franchises, the type most people are familiar with include businesses such as Subway, and Pep Boys which will be the focus of this article.


Business format franchisors offer to their franchisees the license or right to sell its goods or services and/or use its business techniques. The franchisees usually pay an initial fee to acquire this right, and thereafter pay a percentage of their gross sales to the franchisor throughout the term of their franchise contract.

In return for these payments, franchisees gain privileges, including the right to sell a proven and recognized product or service, to use the franchisor's business practices, and to receive initial training and ongoing support. Additional responsibilities can and usually do include:

  • Requirements to meet a variety of quality controls for products and services sold.
  • Restrictions on what they can sell or how they can operate using the company's name.
  • Specifications for their business location and site appearance.
  • Prohibitions on the operation of any similar businesses during or after the term of the franchise agreement

Franchisees usually have an advantage over their nonfranchisee competitors, since they have the rights to use the franchisors’: brand names, trademarks, copyrights, trade secrets, and patents, as well as uniform logos, storefronts, and interiors. However, sometimes the restrictions may outweigh the possible benefits.

Contact an Attorney

Franchise law and agreements can be very complex and intricate. If you are interested in entering a franchise agreement, contact an experienced franchise attorney to ensure your legal rights are protected and to weigh all your options. By knowing your options, you will be able to make the best decision for you, your business, and your future.