© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Chapter 26: Sole Proprietorships and Private Franchises

2 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives What advantages and disadvantages are associated with the sole proprietorship? What is a franchise? What are the most common types of franchises? What laws govern a franchising relationship? What terms and conditions are typically included in a franchise contact? What is wrongful termination? In what types of situations do courts typically find that a franchisor has wrongfully terminated a franchise?

3 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Introduction Entrepreneurs wishing to start a new business must be aware of advantages and disadvantages of various business entities for their endeavor. Consider: –Ease of creation. –Owners’ liability. –Tax considerations. –Need for Capital.

4 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. AdvantagesDisadvantages Owner is in complete control & receives all profits Owner is personally liable for all torts/contracts FlexibilityLacks continuity after death Ease of creation; maintenanceDifficult to raise financing The owner is the business itself; anyone who does business without creating a separate legal business organization is a sole proprietorship. Sole Proprietorships Case 26.1 Garden City Boxing Club, Inc. v. Dominguez. Restaurant was a sole proprietorship for commercial purposes and owner (Dominguez) is personally liable.

5 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Franchises Franchise is an arrangement between a Franchisor (owner of a trademark or trade name) and a Franchisee can sell goods or services. 25% of all retail sales based on franchise merchandising.

6 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Types of Franchises Distributorship. –Involves licensing a product and may include a territory. Chain-Style Business Operation. –Involves licensing a trademark (or brand). –Franchisee required to followed standardized operations and quality control. –Sometimes franchisee may be required to buy supplies from franchisor. Manufacturing or Processing Plant. –Involves essential ingredients or formula to make a product.

7 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Laws Governing Franchising Generally governed by contract law. If involves sale of goods over $500, UCC Article 2 applies. Federal Regulation of Franchising. –FTC “Franchise Rule” requires certain material disclosures. State Regulation. –Often involves bad faith and deceptive practices.

8 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Franchise Contract Key Provisions: –Payment. –Business Premises and Organization. –Location of the Franchise. –Quality Control (key issue). –Pricing Arrangements (including supplies from franchisor).

9 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Termination of the Franchise Duration is determined by contract. Notice is by contract, or within a reasonable time. Franchisor can give franchisee an opportunity to “cure” an ordinary breach, but not a material breach. Case 26.2 LJL Transportation, Inc. v. Pilot Air Freight Corp. Even though a franchise contract contains a “right-to- cure” clause, a franchisee’s material breach of contract can justify immediate termination of contract.

10 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Termination of the Franchise Wrongful Termination. –Favor franchisor. –Federal and state laws attempt to protect franchisee from arbitrary and unfair actions. Importance of Good Faith and Fair Dealing. Case 26.3 Chic Miller’s Chevrolet, Inc. v. General Motors Corp. After several notices, GM acted in good faith when it terminated Miller’s franchise contract for failure to maintain the line of credit.