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The General Practitioner's Guide to Franchising

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The General Practitioner's Guide to Franchising THE GENERAL PRACTITIONER’S GUIDE TO FRANCHISING MARK H. MILLER Jackson Walker L.L.P. 112 East Pecan, Suite 2100 San Antonio, Texas 78205 (210) 978 -7700 K-2 Intellectual Property Law Institute For The Non -I.P. Specialist TABLE OF CONTENTS I. INTRODUCTION ................................ ................................ ................................ ................ 5 A. In General ................................ ................................ ................................ .................... 5 B. Federal Franchise Regulation ................................ ................................ ........................ 5 C. State Franchise Laws ................................ ................................ ................................ .... 6 D. Business Opportunity Laws ................................ ................................ .......................... 6 E. Texas Business Opportunity Act ................................ ................................ ................... 6 F. Relationship Laws ................................ ................................ ................................ ........ 6 II. PROSPECTIVE FRANCHISEES ................................ ................................ ......................... 6 A. Franchise Purchases Are Different ................................ ................................ ................ 6 1. IN GENERAL ................................ ................................ ............................... 6 2. THE CLIENT ................................ ................................ ................................ 7 3. THE FRANCHISE AGREEMENT ................................ ................................ 7 4. THE FRANCHISOR ................................ ................................ ...................... 7 5. AVAILABLE INFORMATION ................................ ................................ ..... 7 6. SELF PRESERVATION ................................ ................................ ................ 7 B. The Attorney's Role ................................ ................................ ................................ ..... 8 1. BE A COUNSELOR ................................ ................................ ...................... 8 2. STRESS THAT IT IS A BUSINESS ................................ ............................. 8 C. Educate Yourself About Franchis ing ................................ ................................ ............ 8 1. PRACTICAL KNOWLEDGE ................................ ................................ ........ 8 2. FRANCHISE ADVANTAGES ................................ ................................ ...... 8 3. FRANCHISE DISADVANTAGES ................................ ................................ 9 D. Initial Interview ................................ ................................ ................................ ............ 9 1. FIRST CONTACT ................................ ................................ ....................... 10 2. OPENING GAME: COPY AND INTERROGATE ................................ ..... 10 3. MIDDLE GAME: ANALYZE THE PAPERWORK ................................ ... 10 4. END GAME: ASSIGN TASKS ................................ ................................ .. 10 E. Busi ness Advice ................................ ................................ ................................ ......... 11 1. SHOULD THE LAWYER GIVE BUSINESS ADVICE? ............................. 11 2. BUSINESS ADVICE ................................ ................................ ................... 11 3. QUALIFY THE CLIENT ................................ ................................ ............ 12 F. Negotiating The Franchise Agreement ................................ ................................ ........ 12 1. NEGOTIATING CHANGES ................................ ................................ ....... 12 2. OTHER ISSUES ................................ ................................ .......................... 13 G. Other Due Diligence ................................ ................................ ................................ .. 14 1. FRANCHISEE ASSOCIATIONS ................................ ................................ 14 2. VISIT FRANCHISOR'S HEADQUARTERS ................................ ............... 14 3. OTHER INFORMATION ................................ ................................ ............ 14 III. UNHAPPY FRANCHISEES ................................ ................................ ............................... 15 A. Practical Advice ................................ ................................ ................................ ......... 15 B. Legal Theories ................................ ................................ ................................ ........... 16 1. FRANCHISEE'S GOAL ................................ ................................ .............. 16 2. BUSINESS OPPORTUNITY ACT ................................ .............................. 17 3. DECEPTIVE TRADE PRACTICES ACT ................................ ................... 17 Franchising Primer K-3 4. COVENANT NOT TO COMPETE ................................ ............................. 18 5. OTHER THEORIES ................................ ................................ .................... 19 IV. SELLERS WHO DO NOT WANT TO BE FRANCHISORS ................................ .............. 20 A. Federal Definition Of Franchising ................................ ................................ ............... 20 1. DEFINITION ................................ ................................ ............................... 20 2. DISTRI BUTORSHIP EXAMPLE ................................ ............................... 20 B. How To Avoid Being A Federal Franchisor ................................ ................................ 21 1. AVOID THE FRANCHISE DEFINITION ................................ .................. 21 2. USE EXEMPTIONS AND EXCLUSIONS ................................ ................. 24 3. DO NOT MISUSE THE TERM "FRANCHISE"Error! Bookmark not defined. 25 C. State Definitions Of Franchising ................................ ................................ ................. 25 1. IN GENERAL ................................ ................................ ............................. 25 2. MARKETING PLAN DEFINITION ................................ ............................ 25 3. COMMUNITY OF INTEREST DEFINITION ................................ ............ 27 4. OTHER DEFINITIONS ................................ ................................ ............... 28 5. EXEMPTIONS AND EXCLUSIONS ................................ .......................... 28 D. Federal Definition Of Business Opportunity ................................ ............................... 28 1. IN GENERAL ................................ ................................ ............................. 28 2. DEFINITION ................................ ................................ ............................... 29 3. EXAMPLE ................................ ................................ ................................ .. 29 E. State Definitions of Business Opportunity ................................ ................................ ... 29 1. IN GENERAL ................................ ................................ ............................. 29 2. MAJORITY DEFINITION ................................ ................................ .......... 29 3. OTHER STATES ................................ ................................ ........................ 31 F. Texas Definition Of Business Opportunity ................................ ................................ .. 31 1. DEFINITION ................................ ................................ ............................... 31 2. THREE PART TEST ................................ ................................ ................... 31 3. TO BEGIN A BUSINESS ................................ ................................ ............ 31 4. INITIAL CONSIDERATION ................................ ................................ ...... 32 5. THRESHOLD REPRESENTATIONS ................................ ......................... 33 6. THE FRANCHISOR EXEMPTION ................................ ............................ 34 7. OTHER EXEMPTIONS ................................ ................................ .............. 36 8. CONSTRUCTION ................................ ................................ ....................... 37 V. PROSPECTIVE FRANCHISORS ................................ ................................ ....................... 38 A. The Lawyer's Role ................................ ................................ ................................ ..... 38 B. Should The Client Fra nchise?Error! Bookmark not defined. ................................ ....... 38 C. Full Disclosure ................................ ................................ ................................ ........... 39 D. The Franchisor's TrademarkError! Bookmark not defined. ................................ ......... 40 E. Structuring A Successful System ................................ ................................ ................ 40 1. THE FRANCHISE AGREEMENT ................................ .............................. 40 2. THE OPERATIONS MANUAL ................................ ................................ .. 41 3. STAFFING UP ................................ ................................ ............................ 41
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