Member Groups

The Catalyst
The newsletter of the ISBA’s Standing Committee on Women and the Law

September 2005, vol. 11, no. 1

Franchising opportunities for women

With the complexities of juggling a family, career, and community service, franchising opportunities are especially appealing to women. Franchising provides women with a unique opportunity to be their own boss and display their entrepreneurial spirit while taking advantage of the franchisors' existing systems of operational processes, training, and support. Some of the more popular franchise systems for women have been those that offer the most flexibility and control over their schedules, including childcare facilities, tutoring programs, cosmetics companies, flower shops, hair salons, housekeeping services, and weight-loss centers. Below are answers to some of the most frequently asked questions regarding franchises.

1. How many women are involved in franchises?

According to the International Franchise Association, women currently own about 38 percent of all franchises, and women are beginning to buy franchises outside the traditional women's areas. This corresponds to the fact that women now make up 32 percent of the country's 12.2 million business owners, according to a recent study sponsored by the U.S. Small Business Administration ("SBA"). However, most women co-own franchises with their husbands, and only 10 percent of franchises are owned solely by women, according to an SBA report. Some franchisors have made recruiting women a priority because it may provide them entrance to a market they had not considered before. KFC, 7-Eleven, and Thrifty Car Rental are three franchisors that have created assistance programs for women and minority franchisees.

2. What are franchisee benefits to women?

Franchising offers women two major advantages: self-employment using a proven method, and the flexibility to cater a business to the lifestyle they want. Franchising is a relationship-driven industry, and many women find they are good at managing relationships as well as business. A franchisee receives the intangible advantage of starting and operating under the umbrella of a recognized brand name and established reputation and the use of the franchisor's marketing concept and expertise. Franchisees may engage in business with less capital than would be required to start and operate a completely independent, unaffiliated outlet because of the resources that are available in the franchise relationship.

3. What is the definition of a "franchise"?

The term "franchising" has been applied to many different kinds of trade name and trademark licensing and distribution arrangements. Within the spectrum of business arrangements, one finds a variety of legal relationships, and "franchising" is not susceptible to a very specific definition.

The Federal Trade Commission's regulations characterize a "franchise" as an arrangement in which: (a) the franchisee sells goods or services identified by the franchisor's trademark and that meet the franchisor's quality standards; (b) the franchisor has control over the franchisee's method of operation or gives the franchisee assistance; and (c) to obtain the franchise, the franchisee is required to make a payment to the franchisor of at least $500 within six months after commencing operations under the franchise. 16 C.F.R. § 436.2.

In Illinois, the Franchise Disclosure Act of 1987, 815 ILCS 705/1, et seq., defines a "franchise" as an agreement by which: (a) a franchisee is granted the right to engage in the business of selling goods or services under a marketing plan prescribed by a franchisor; (b) the operation of the franchisee's business is substantially associated with the franchisor's trademark, advertising, or other commercial symbol; and (c) the franchisee is required to pay a franchise fee of $500 or more. 815 ILCS 705/3(1).

4. Are franchises subject to regulation by state and/or federal authorities?

Yes, a franchise is almost certainly subject to regulation by state and/or federal authorities. The Illinois Attorney General has broad power to regulate the offer and sale of franchises, and is vested with civil and criminal enforcement powers. 815 ILCS 705/22(a), 705/24-705/26.

5. What are some start-up and pre-start-up services frequently provided to franchisees?

(1) Market surveys and aid in selecting a suitable site; (2) negotiating leases or providing plans and specifications for facility design and construction; (3) training the franchisee and key employees, and providing operating manuals, accounting systems, and recordkeeping materials; (4) aid in procuring financing; and (5) start-up assistance with franchisor employees and with preopening promotional aids.

6. What are the most frequently provided continuing services to franchisees?

(1) Periodic franchisee employee retraining and training for new supervisory employees; (2) periodic inspection to ensure maintenance of product, service quality, and standardization; (3) promotion, advertising, and merchandising materials; (4) merchandise selection, inventory control aids, marketing data, and, on a voluntary participation basis, provision for centralized purchasing; (5) aid in purchasing and financing equipment; and (6) auditing or bookkeeping and recordkeeping services.

7. What are the sources of franchisor revenue?

The two most common sources of franchisor revenue are nonrecurring initial license or franchise fees and royalties. The royalty is a periodic percentage payment for use of the trademark and trade name and for benefits available during the term of the franchise relationship on a continual basis, such as supervision, inspection, and operating and marketing advice.

Revenue also may come from a combination of the following: (1) sales of general supplies, inventory, or equipment (or rentals from the leasing of equipment); (2) rentals from a lease or sublease of the retail outlet premises; (3) payments for promotion campaigns and advertising; and (4) fees for special services, such as tax and accounting services, and computer support services.

8. What needs to be registered with the Illinois Attorney General before the offer or sale of a franchise in Illinois?

The offering must be registered and sold by means of an offering circular. Under the Franchise Disclosure Act of 1987 (the "Act"), this offering circular must be delivered to a prospective franchisee at least 14 business days before acceptance of consideration or execution of any franchise agreement. 815 ILCS 705/5(2). (Note, however, that the time period in the federal regulations promulgated under the Federal Trade Commission Act, 15 U.S.C. § 41, et seq., which have preemptive effect, is 10 business days. See 16 C.F.R. § 436.2(g).) The Act is applicable to all offers and sales that involve either (1) a franchisee domiciled in Illinois or (2) an offer or acceptance of a franchise that occurs in Illinois if the franchise is to be located in Illinois. 815 ILCS 705/10.

9. How can a franchisor obtain a franchise registration?

To obtain a franchise registration pursuant to §10 of the Act, a franchisor must file (1) an initial registration application; (2) an offering circular, including financial statements and franchise and other agreements; and (3) a consent to service of process naming the Illinois Attorney General as the franchisor's agent to receive service of process. See 14 Ill. Admin. Code § 200.600(a). If a material change occurs with respect to any facts required to be disclosed in the franchisor's offering circular, the franchisor is required to amend its offering circular and to submit the amended circular to the Illinois Attorney General. 815 ILCS 705/11. The franchisor may use the amended prospectus as soon as it is filed with the Attorney General. The Act also provides that if the changes reflect negotiations between the franchisor and a franchisee with respect to the terms of the franchise agreement, an amendment is not required. Id.

The Act prohibits the inclusion of untrue statements or the omission of statements of material fact in any application, notice, or report filed with the Illinois Attorney General. 815 ILCS 705/5(4). The statutory duty to disclose material facts ends when there is a binding commitment to enter into a franchise relationship. Bonfield v. AAMCO Transmissions, Inc., 708 F. Supp. 867 (N.D. Ill. 1989). Although a franchisee may execute a franchise agreement, if this agreement is conditioned on the approval of the franchisor, there is no binding commitment until the franchisee has been approved. Id.

10. What is the purpose of the franchise agreement?

The purpose of a franchise agreement is to define the rules of the relationship and to protect the entire franchise system from any operator conducting its business in a manner that might be injurious to another operator of the system as a whole. There is no standard format because the terms and conditions vary from franchise to franchise and from industry to industry.

In general, franchise agreements cover the following: (1) training and/or ongoing support provided by the franchisor; (2) assigned territory; (3) duration of the franchise agreement; (4) franchise fee and total anticipated investment; (5) trademark, patent, and signage use; (6) royalties and other fees; (7) advertising; (8) operating standards; (9) renewal rights and franchisee termination/cancellation policies; and (10) resale rights. Other provisions that may be included in the franchise agreement include: accounting and records; audits; insurance; taxes, permits, and indebtedness; and dispute resolution. Most franchise companies will not negotiate the terms of their franchise agreements, except for the definition of the protected territory.

For women looking to own their own business, owning a franchise can provide great opportunities. It is advisable that franchisees seek the advice and consultation of competent legal counsel prior to executing a franchise agreement. The International Franchisee Association has a Women's Franchise Committee on its Web site which can provide women with a mentor.

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Anita Ponder is a partner with the national full-service law firm of Gardner Carton & Douglas LLP. Her unique law practice focuses on commercial transactions, government contract, procurement law, and government relations. Alison Helin, who contributed to this article, is an associate attorney in the Litigation Department of Gardner Carton & Douglas LLP. Her practice focuses on commercial litigation.