Franchises – The Good, the Bad and the Ugly

Posted: June 27, 2011 in The Party Bike
Tags: , , , , , , , , , , , , ,

http://www.thepartybike.com

The Party Bike business is a fun and unique opportunity. It is just in its infancy here in the United States, but well known in parts of Europe. In Europe, the sight of a beerbike is nothing new, whereas her in the USA, people will stop, laugh and take pictures when one passes by. But how are these businesses started? There are basically two options available at this time. You can opt for a franchise operation or you can opt to just purchase a bike and run your own business your own way. Atek Customs does not offer franchises, we only manufacture and sell the Party Bike and it is up to you to build, run and enjoy your own business.

What exactly is a franchise? According to About.com, “A franchise is a right granted to an individual or group to market a company’s goods or services within a certain territory or location. Some examples of today’s popular franchises are McDonald’s, Subway, Domino’s Pizza, and the UPS Store.”

About.com goes on to state, “An individual who purchases and runs a franchise is called a ‘franchisee.’ The franchisee purchases a franchise from the ‘franchisor.’ The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee, as well as an up-front, one-time franchise fee to the franchisor.”

The benefit to a franchise is typically its name recognition. Everybody knows that the golden arches are McDonalds. If you buy into that franchise, it is not necessary to educate your potential customers about who you are and what you offer. In addition, people know your product. A Big Mac is the same everywhere. McDonald’s French fries taste the same in Texas as they do in Utah.

The federal government considers most business arrangement transactions as either a “franchise” or a “business opportunity.”

According to the Federal Trade Commission Rule, a franchise is an oral or written agreement that contains each of the following three elements:

  • Permission, express or implied, to do business under a unified trademark or other commercial symbol;
  • Payment to the trademark owner or affiliate, directly or indirectly, in any form, including future payment, such as royalties;
  • Existence of significant controls or assistance (in some states this is defined as a marketing plan or as an ongoing commercial relationship between the parties).

A franchise opportunity is a long, lengthy legal process that is regulated by the Federal Trade Commission. According to the FTC regulations, a Franchise Disclosure Document must be given to the prospective franchisee a minimum of 14 day before the final contract date. This required document includes 23 items of information and financial statements about the franchisor, as well as a copy of the contract to be signed. This document must provide information concerning the parent company’s financial condition, contracting, advertising, licensing, contract fees and sale of the franchise.

The purpose of this Franchise Disclosure Document and the franchise regulations is to provide the potential franchisee with a full disclosure of all information concerning the franchisor.

But simply calling an arrangement a “licensing contract”, “distributorship,” “partnership opportunity” etc. rather than a “franchise” does not always alleviate the parent company from the rigorous FTC regulations. Companies which try to avoid the FTC regulation by calling the contract something other than it is risk civil penalties of up to $10,000 per violation of the regulations, plus a cancellation of the contract and a full refund of the franchisee’s money. Typically, multiple violations of the regulations occur in a single contract, therefore the fines can add up to a substantial amount.

If you have an agreement where the parent company exerts control over the business model and gets paid, you will most likely be considered a franchise and are subject to the FTC franchise regulations.

A business opportunity, however, typically exercises no control over the buyer’s operations after the sale. There is usually no continuing relationship, no obligations, and no continuing fees or ongoing royalties. A business opportunity typically does not limit the business owner’s selling area or restrict its operation. It also does not provide you with a marketing plan or trademark rights. Most business opportunities simply provide the sale of equipment and then allow you to operate your business as you see fit.

So which business model is better? It depends. Some people feel they will be more successful tied contractually to another entity. However, at The Party Bike, we have no desire to tell you how to run your business. We don’t sell franchises and we don’t require complex legal agreements. We don’t collect ongoing fees or royalties. We won’t tell you how to market your business. We won’t tell you who you can hire or fire. We won’t tell you where to buy your supplies.

We feel that if you are willing to pay $45,500 for one of our bikes, chances are pretty good that you already know what you want to do with it. You don’t need us to tell you.

We chose this model because we also do not feel that it is your responsibility to support us into the future. We will work for our income by building and selling the best bike on the market, not from requiring you to pay us a certain amount each year for the privilege of using your own bike.

So before you sign any paperwork from any bike manufacturer, supplier or distributor, consult a lawyer. If you are told that a particular written provision won’t be enforced, be sure it is deleted from the contract before you sign. If something is promised, be sure it is included in the contract. Have all paperwork reviewed by your lawyer. If you are signing anything that remotely resembles a franchise agreement, be sure that you have qualified legal advice and are complying with all franchise laws and regulations.

Know what you are getting into before it is too late!!

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