HOUSTON BUSINESS REVIEW

CYA: Expanding Your Business Through Franchising
By Shahara Wright

Shahara D. Wright, Business Law Attorney, "Serving businesses from start-up through expansion". You can cantact her by: calling her at (281) 980-2040, sending her an e-mail or visiting her website. For more information concerning Shahara Wright click here.

One way for a business to grow is through franchising. Franchising is an agreement between an established business (Franchisor) and another business or person (Franchisee) that grants a privilege to market goods and services under the business name of the Franchisor. The purpose of the franchise is to allow the franchisor to expand its business by selling its product or service through others.

There are two basic types of franchises. A business format/package franchise and product franchise. In a business format/package franchise the franchisor licenses the franchisee to use the business system prescribed and trademarked by the franchisor. The franchisor will furnish significant assistance, marketing, and/or systems to its franchisees, which requires them to adhere strictly to the controls and methods of operation under the business system. Under the product franchise, the franchisee sells goods that are produced by the franchisee and trademarked by the franchisor. The franchisor exercises significant control over the franchise method of operation or promises to provide a significant amount of assistance in the method of operation. The franchisee is typically required to pay the franchisor for the right to distribute the goods. Payment may take the form of required purchases of trademarked goods or payment of an initial franchise fee.

Any business opportunity which has an initial consideration of more that $500.00 of products, equipment, supplies, or services that will be used by or for the purchaser to begin a business in Texas must register with the State. Texas requires the franchisor to register the offer of this franchise within the state and to provide each potential franchisee with a disclosure statement. This statement contains information about the franchisor, the franchise, and the terms and conditions of the agreement. The future franchisor must furnish potential franchisees with written disclosures providing important information about the franchisor, the franchised business and the franchise relationship, and give the potential franchisee at least ten business days to review it before investing. Franchisors may make the required disclosures by either the Business Opportunity Registration (BOR) or the Uniform Franchise Offering Circular Guidelines (UFOC). BOR requires certain disclosures within the State of Texas. The BOR requires supplemental filings of Salesperson updates every six months and disclosure statement updates annually. In addition, the franchisor must either, obtain a surety bond, establish a trust account, or obtain an irrevocable letter of credit. UFOC is a disclosure format which is authorized by the Federal Trade Commission. Texas accepts this form of disclosure as well and will allow the Franchisor to file for an Exemption from registration. This option requires more paperwork, however many states recognize the UFOC and if you choose to offer the Franchise in other states, you may not have to redo the disclosure statements.

Nothing in this article is intended as legal advice and you should consult an attorney before making any decisions.