Chapter 36
Sole Proprietorships and Franchises
See Separate Lecture Outline System
INTRODUCTION
The most common forms of business organization are the sole proprietorship and, when two or more persons are
involved, the partnership and the corporation, with the limited liability company becoming increasingly popular. In this chapter,
the basic features of sole proprietorships are briefed, and some of their advantages and disadvantages are spelled out. There is
also a discussion of private franchises.
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
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CHAPTER OUTLINE
I. Sole Proprietorships
The simplest form of business is a sole proprietorship. Sole proprietorships constitute over two-thirds of American
businesses. They are usually small enterprises—99 percent of those in the United States earn less than $1 million per
year.
CASE SYNOPSIS—
Case 36.1: Garden City Boxing Club, Inc. v. Dominguez
Garden City Boxing Club, Inc. (GCB), owned the exclusive right to broadcast via closed-circuit television several
prizefights and sold the right to receive the broadcasts to commercial venues. Antenas Enterprises sells satellite
television systems under a contract with DISH Network. Antenas identified a new customer as Jose Melendez at a
commercial (restaurant) address but designated the account residential. The business’s patrons watched several GCB
fights, but the business paid only the residential rate to DISH and nothing to GCB. GCB filed a suit in a federal district
court against Antenas’s owner.
proprietorship. “Accordingly, [its owner] is personally liable.”
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Notes and Questions
What is the specific reasoning for imputing Garcia’s acts to Dominguez? According to the court, “[u]nder the
doctrine of respondeat superior, an employer is liable for injuries to third persons resulting from acts by an employee
which, although not directly authorized or ratified by the employer, are incidental to the class of acts which the
employee is hired to perform, and which are within the scope of his employment.” Here “Antenas Enterprises was
hired to install a satellite system, complete a work order, and transmit the appropriate information to DISH Network.
Garcia entered Mundelein Burrito as a representative of Antenas Enterprises in order to complete these tasks. . . .
Despite the fact that it was clearly a commercial establishment, Garcia did not [designate it as such on] the work order.
Installing the satellite and completing the work order were within the scope of Garcia’s employment. Thus, under the
doctrine of respondeat superior, his actions are imputed to Antenas Enterprises.”
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ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 36.1
If Mundelein had identified itself as a residence when ordering the satellite system, how might the result in this
case have been different? The result would not likely have been different. Antenas, through Garcia or some other
employee, would have installed the system at the restaurant, which, according to the court, was clearly a commercial
establishment, The court held the defendant liable because he, through his proprietorship and its employee, allowed
the prizefight broadcasts to be available to a commercial establishment without authorization.
ANSWER TO “THE GLOBAL DIMENSION” QUESTION IN CASE 36.1
Because the Internet has made it possible for sole proprietorships to do business worldwide without greatly
increasing their costs, should they be considered, for some purposes, the equivalent of other business forms Why or
enterprise would be dwarfed by the sales of most associational business forms. Global distribution capabilities cannot
convert a sole proprietorship into a corporation with its limited liability and other attributes. And to expand the
appearances and in other situations..
II. Franchises
A franchise is any arrangement in which the owner of a trademark, a trade name, or a copyright has licensed others to
use it in selling goods or services. A franchisee is generally legally independent, but economically dependent on the
integrated regional or national business system of the franchisor.
A. TYPES OF FRANCHISES
1. Distributorships
2. Chain-Style Business Operation
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3. Manufacturing Arrangement
In this arrangement, the franchisor transmits to the franchisee the ingredients or formula to make a
product, which is marketed according to the franchisor’s standards.
B. LAWS GOVERNING FRANCHISING
There is not a solid body of appellate decisions from federal or state courts relating to franchises. Courts tend to
apply general common law principles and appropriate statutory definitions and rules.
1. Federal Regulation of Franchises
a. Industry-Specific Standards
47).
b. The Franchise Rule
2. State Protection for Franchisees
State legislation tends to be similar to federal statutes and regulations (to protect prospective franchisees
from dishonest franchisors and prohibit franchisors from bad faith termination).
ANSWER TO CRITICAL ANALYSIS QUESTION IN THE FEATURE—
INSIGHT INTO ETHICS
If the law required franchisors to provide estimates of potential earnings, would there be more or less growth in
the number of franchises? All franchisors under such a new law would have to provide some type of estimate of
potential earnings. As a consequence, we will probably see a lower growth in franchises because franchisors will wish
to avoid potential prosecution for providing inflated earnings estimates. Franchisors will therefore provide “low–ball”
estimates. These “low–ball” future earnings estimates will induce fewer individuals to become franchisees.
ENHANCING YOUR LECTURE—
FRANCHISING IN FOREIGN NATIONS
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When Janet Isbell, a sales representative for Mary Kay cosmetics, lost her job, she sued Mary Kay, Inc., claiming
things, this law provided that a franchisor could terminate a franchising relationship only for cause and required that
In the last twenty years, many U.S. companies (particularly fast-food chains and coffeehouses) have successfully
expanded through franchising in nations around the globe. Franchises offer businesses a way to expand internationally
without violating the legal restrictions that many nations impose on foreign ownership of businesses. Although Canada
has been the most popular location for franchises in the past, during the last few years, franchisors have expanded
their target locations to Asia, South America, Central America, and Mexico.
CULTURAL AND LEGAL DIFFERENCES ARE IMPORTANT
Businesspersons must exercise caution when entering international franchise relationships—perhaps even more so
than when entering other types of international contracts. Differences in language, culture, laws, and business
protect its good reputation? If the law in China, for example, does not provide for the same level of intellectual prop–
being copied?
THE NEED TO ADEQUATELY ASSESS THE MARKET
Because of the complexities of international franchising, successful franchisors recommend that a company
seeking to franchise overseas conduct thorough research to determine whether its particular type of business will be
well received in that location. It is important to know the political and cultural climate of the target country, as well as
international markets. Also, because complying with U.S. disclosure laws may not satisfy the legal requirements of
duties).
FOR CRITICAL ANALYSIS
Should a U.S.-based franchisor be allowed to impose different contract terms and quality control standards on
franchisees in foreign nations that are different than those imposed on domestic franchisees? Why or why not?
ENHANCING YOUR LECTURE—
INDEPENDENT CONTRACTOR OR FRANCHISEE?
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the franchisee be given ninety days’ notice. Mary Kay responded that Isbell was not a franchisee but an independent
contractor. The case eventually reached the Arkansas Supreme Court, and in deciding the issue, the court looked to
the Arkansas Franchise Practices Act. At first, the letter of the law, as spelled out in that act, was not very helpful. The
THE BOTTOM LINE
Businesspersons should realize that the law, and not an agreement between private parties, ultimately determines
whether a franchising relationship exists. In some cases, courts have held that even though parties have signed a
the franchisors. In other cases, courts have held that a franchising relationship exists even in the absence of a
a. Mary Kay, Inc. v. Isbell, 338 Ark. 556, 999 S.W.2d 669 (1999).
ADDITIONAL BACKGROUND—
Law and the Franchisee
A franchise arrangement appeals to many prospective businesspersons who want to be financially independent
and yet feel more comfortable working with an established product or service and a management network that is
regional or national in scope and that has been in place for some time. Although franchises have a relatively high
survival rate (90 percent) as compared to small businesses (20 percent), franchise agreements and operations may
cause some franchisees to suffer considerable financial losses.
Nearly all franchise contracts require a franchise fee payable up front or in installments. Some franchise
arrangements hide franchise-fee payments in long-term supply purchase requirements that typically continue for the
duration of the franchise agreement. These purchase requirements will usually require the franchisee to purchase
franchisee may also be required to contribute monies for advertising expenses which are actually in excess of the
Unfortunately, the courts have not yet made a clear statement as to what a franchisee’s rights are upon termination.
Some courts have held, for example, that if a franchise investment is substantial and the relationship between the
parties is an established one, then the franchise cannot be terminated until a reasonable period of time has elapsed.
event, a potential franchisee should always be sure to obtain all the relevant details of the business and of the
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C. THE FRANCHISE CONTRACT
First, prospective franchisees must decide on the type of business they wish to undertake and get information
about the business from the franchisor. This information should include details about the franchise contract.
1. Payment for the Franchise
2. Business Premises
3. Location of the Franchise
4. Business Organization
5. Quality Control
6. Pricing Arrangements
Franchisors may require the purchase of certain supplies at a set price and may set the price at which a fran-
chisee resells goods. This could violate antitrust laws, however.
ENHANCING YOUR LECTURE—
WHAT PROBLEMS CAN A FRANCHISEE ANTICIPATE?
A franchise arrangement appeals to many prospective businesspersons for several reasons. Entrepreneurs who
purchase franchises can operate independently and without the risks associated with products that have never been
marketed before. Additionally, the franchisee can usually rely on the assistance and guidance of a management
obtain all relevant details about the business and that you have an attorney evaluate the franchise contract for possible
THE FRANCHISE FEE
Virtually all franchise contracts require a franchise fee payable up front or in installments. This fee often ranges
between $10,000 and $50,000. For nationally known franchises, such as McDonald’s, the fee may be $500,000 or more.
To calculate the true cost of the franchise, however, you must also include the fees that are paid once the franchisee
opens for business. For example, as a franchisee, you would probably pay 2 to 8 percent of your gross sales as royalties
go to the franchisor to cover advertising costs. Although your business would benefit from the advertising, the cost of
ELECTRONIC ENCROACHMENT AND TERMINATION PROVISIONS
Another problem that many franchisees do not anticipate is the adverse effects on their businesses of so-called
electronic encroachment. For example, suppose that a franchise contract gives the franchisee exclusive rights to
operate a franchise in a certain territory. Nothing in the contract, though, indicates what will happen if the franchisor
sells its products to customers located within the franchisee’s territory via telemarketing, mail-order catalogues, or
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area.
agreement. Before you sign a franchise contract, make sure that the contract provisions regarding termination are
reasonable and clearly specified.
CHECKLIST FOR THE FRANCHISEE
1. Find out all you can about the franchisor: How long has the franchisor been in business? How profitable is the
business? Is there a healthy market for the product?
2. Obtain the most recent financial statement from the franchisor and a complete description of the business.
3. Obtain a clear and complete statement of all fees that you will be required to pay.
4. Will the franchisor help you in training management and employees? With promotion and advertising? By
supplying capital or credit? In finding a good location for your business?
5. Visit other franchisees in the same business. Ask them about their experiences with the product, the market, and
the franchisor.
6. Evaluate your training and experience in the business on which you are about to embark. Are they sufficient to
ensure success as a franchisee?
7. Carefully examine the franchise contract provisions relating to termination of the franchise agreement. Are they
specific enough to allow you to sue for breach of contract in the event the franchisor wrongfully terminates the
contract? Find out how many franchises have been terminated in the past several years.
8. Will you have an exclusive geographic territory and, if so, for how many years? What plans does the franchisor
have in regard to telemarketing, electronic marketing, and mail-order sales to customers within the territory?
9. Finally, the most important way to protect yourself is to have an attorney familiar with franchise law examine the
contract before you sign it.
III. Franchise Termination
A franchise usually begins with a short term, such as a year, which is extended or increased if everything works out.
Termination must be for cause, such as the franchisee’s death, disability, insolvency, breach of the agreement, or
failure to meet quotas. There must be notice and reasonable time to wind up the business.
CASE SYNOPSIS—
Case 36.2: LJL Transportation, Inc. v. Pilot Air Freight Corp.
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Pilot Air Freight Corp. franchisees included LJL Transportation Inc., which Louis Pektor and Leo Decker own. The
franchise agreement required LJL to route all shipments through Pilot. The agreement also provided, “Pilot shall allow
Franchisee an opportunity to cure a default within ninety (90) days of receipt of written notice.” When LJL diverted
shipments to Northeast Transportation, a competitive service owned by Pektor and Decker, Pilot terminated the
franchise agreement. LJL filed a suit in a Pennsylvania state court against Pilot, alleging breach of contract and asserting
a right to cure. The court issued a judgment in Pilot’s favor and a state intermediate appellate court affirmed. LJL
appealed.
a material breach of the contract so serious it goes directly to the heart and essence of the contract, rendering the
dealing contravenes those requirements, violating the trust on which an agreement is based. A franchisee’s breach of
these duties goes to the contract’s “heart.” In that situation, a franchisor could terminate the franchise agreement
without notice despite any right-to–cure provision.
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Notes and Questions
The Pilot franchise agreement required LJL to file reports with the franchisor detailing daily shipments and other
business. To divert shipments, LJL had filed false reports. What covenant might be implied in this requirement? Did LJL
breach it? This requirement might be construed to create an implied covenant in which the franchisee agreed not to
engage in schemes that would deprive the franchisor of its revenue. LJL would have breached this covenant by filing
false reports. This conduct too could have been held to be sufficiently fraudulent to render obsolete the right-to-cure
provision of the agreement: the only way that Pilot had of knowing the business that transpired would have been
based on the reports.
acts of self-dealing were so serious they frustrated the principal purposes of the franchise agreement. From an ethical
perspective, as well as the legal view, no remedy for the breach existed because no amount of repayment of the lost
diversions early in LJL’s breach. Even if this were true, however, the breach would have been no less serious and might
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 36.2
From an ethical perspective, if LJL had been allowed to invoke the right–to-cure provision, could it have undone its
wrongdoing so that the franchise relationship could have continued? Why or why not? Probably not. No amount of
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payment for LJL’s theft could restore Pilot’s business trust and confidence in its franchisee. More than revenue or
profit, that is what was lost by the breach. LJL’s lack of ethics in its acts of self-dealing, and its legal breach of the agree-
ment, undermined the parties’ relationship to the extent that their deal could probably not be restored. Pilot might
have been justified in rescinding the contract even if it had been for a fixed term with no right of termination.
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 36.2
Suppose that Pilot had terminated its franchise agreement simply because it no longer wished to be bound. Would
refusing to allow LJL to invoke the right-to-cure provision in that circumstance have been valid? No. A party’s attempt
to terminate an agreement not because of any egregious or fraudulent conduct of the other party—which would
would not excuse a refusal to follow the procedure for termination set out in the agreement. The attempted
A. WRONGFUL TERMINATION
Much of the franchise case law that exists concerns termination—bad faith, unconscionability of the contract
termination provisions, and so on
CASE SYNOPSIS—
Case 36.3: Mac’s Shell Service, Inc. v. Shell Oil Products Co.
For many years, Shell Oil Co. offered its franchisees a rent subsidy that reduced the monthly rent for their service–
station premises. The subsidy was renewed annually, subject to thirty days’ notice. As part of a joint venture, Shell
assigned some of its franchise agreements to Motiva Enterprises LLC. Motiva ended the rent subsidy in the
agreements. These franchisees filed a suit in a federal district court against Shell and Motiva, alleging that eliminating
the subsidy had constructively terminated their franchise agreements in violation of the Petroleum Marketing Practices
Act (PMPA). The court ruled in the franchisees’ favor. The U.S Court of Appeals for the First Circuit affirmed. The
defendants appealed.
purchase of the franchisor’s fuel, or occupation of the franchisor’s service station. . . . Conduct that foes not force an
end to the franchise . . . is not prohibited.” This distinction falls within the meaning of “the Act’s plain terms” and “is
consistent with the general understanding of the doctrine of constructive termination” under which “a plaintiff must
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Notes and Questions
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plain text of the statute [the PMPA] leaves no room for a franchisee to claim that a franchisor has unlawfully declined
Does a franchisee have any recourse when a franchisor changes the terms of their franchise agreement? Yes, there
could be grounds for a breach-of-contract suit, if the changes are imposed without consent, and they are one-sided and
unconscionable, or otherwise arguably in violation of the law. If the contract had been induced by fraud, there is a
basis for a claim. But if the franchisor acted in good faith and dealt fairly, if the franchisee entered into the contract
with full knowledge of its terms, and if the contract included a notice provision with respect to the franchisor’s
changes, there might be little ground on which the franchisee could obtain relief.
ANSWERS TO QUESTIONS AT THE END OF CASE 36.3
1. The PMPA regulates only the circumstances in which franchisors may terminate a franchise or decline to renew a
franchise relationship. Are there any reasons why Congress might have limited the scope of the PMPA to just these
two aspects of franchising? Explain. In enacting the PMPA, Congress left undisturbed the body of state law, including
of franchising in that industry with which it was most concerned—the termination of and the failure to renew franchise
2. Suppose that some of the service-station franchisees, on the expiration of their contracts with Shell, signed a
renewal agreement with Motiva, even though the franchisees believed that the rental terms of the new agreement
were unacceptable. Given the Court’s reasoning on the issue of constructive termination, would the franchisees have
been likely to succeed in a suit against the franchisor for “constructive nonrenewal” of the franchise agreement? Why
or why not? Probably not. In fact, one of the issues in this case—not included in the excerpt of the Court’s opinion
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asserting its power. Maybe the franchisor hoped to drive the higher priced restaurant out of business to make
ultimately more profit in the lower priced restaurant. Maybe the franchisor did not necessarily intend to drive the
franchisee out of business, but only wanted to attract patrons with different incomes.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases focusing on the termination of franchises include the following.
• Zeidler v. A & W Restaurants, Inc., 301 F.3d 572 (7th Cir. 2002) (a franchisee’s closing of its restaurant barred it
from establishing that the franchisor wrongfully terminated the franchise, even though the franchisee asserted that the
franchisor acted in bad faith by threatening termination, because the franchisee could not show a link between the
termination threats and the restaurant’s closure and the voluntary abandonment of the franchise constituted good
cause for the franchisor to terminate the agreement).
• Hale Trucks of Maryland, LLC v. Volvo Trucks North America, Inc., 224 F.Supp.2d 1010 (D.Md. 2002) (a truck
manufacturer was entitled to terminate a dealership agreement on fifteen days’ notice after the dealer’s lender
repossessed all of the dealer’s vehicles).
Chrysler-Plymouth dealer’s suit against termination of its Plymouth franchise by Daimler Chrysler Motors Corp., it was
for the termination of the franchise on the discontinuation, and thus good cause for termination of the franchise
existed as a matter of law).
ownership of a franchisee’s auto dealership constituted good cause for the termination of the franchise when the
majority of the dealership’s new owner’s customer satisfaction index scores were below average).
B. THE IMPORTANCE OF GOOD FAITH AND FAIR DEALING
Franchise statutes often cover termination, requiring good faith and fair dealing. Courts generally try to balance
the rights of both parties and provide a remedy if the franchisor acted unfairly. If termination occurred in the
normal course of business and reasonable notice was given, however, termination was not likely wrongful.
TEACHING SUGGESTIONS
1. Explain that creditors are often reluctant to permit the owner of a sole proprietorship to contract out of personal
liability because the business assets may not satisfy all of the creditors’ claims if the debts are not paid. Many lenders
insist that a sole proprietor sign a personal guaranty so that the lender will have recourse to his or her personal assets.
2. Sometimes, a franchisor appears to attempt to drive its franchisee out of business by establishing a competing
business within the geographic market area. Why would a franchisor attempt to drive its own franchisee out of
business? There are several possible reasons. Perhaps the franchisor was not using good business judgment but only
3. Why do we tend to sympathize with a franchisee when a franchise arrangement is terminated unilaterally by the
franchisor? We tend to assume that the cancellation of a franchise agreement for “good cause” can only occur if the
4. Remind students of the importance of agency law principles in business organizations. Even a franchise may be
deemed a principal-agent relationship if there is a close relationship between a franchisor and its franchisee.
Cyberlaw Link
Which form of business organization would be best for a business that transacts deals only online? What are the
legal and policy issues for the design, development, and operation of a sole proprietorship’s Web site?
DISCUSSION QUESTIONS
1. What is an entrepreneur? An entrepreneur is one who initiates and assumes the financial risks of a new enterprise and
3. Discuss the principal types of franchises. A franchise may take the form of (1) a distributorship, (2) a chain-style
business operation or (3) a manufacturing (or processing-plant) arrangement. (1) A distributorship is established when a
4. How is a franchise paid for? The franchisee ordinarily pays an initial fee or lump-sum price for the franchise license.
5. What is the duration of a franchise? The duration of the franchise is determined by the parties. Most franchises begin
6. Should a franchisor be allowed to control the operation of its franchisee—with a goal of maintaining a certain standard of
quality—without liability for the franchisee’s conduct? No, because there should be some responsibility (liability) assumed for
the exercise of control over the franchise’s activities. Yes, because the franchisee should be responsible for its own conduct.
What would constitute a “right to control” under a franchise contract? A franchisor would have a “right to control” if it retained
a right to intervene in employee management. “Helpful hints,” “guidelines,” “words of advice,” and similar suggestions or
recommendations for addressing problems and disciplining employees would likely not be enough. Whichever party has the
discretion to set the terms and conditions of employment would most likely be considered to have a “right to control.” In the
absence of a “right to control,” could a franchisor be found vicariously liable for the actions of a franchisee’s employees? Yes, if
the franchisor exercised actual control.
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Ask students to discuss any of their own experiences as sole proprietors. They might especially be asked to discuss to
advantages and disadvantages of this form of business as those factors were made apparent by their experiences.
2. Ask students about running businesses on the Internet. Is it easier to start a business in “virtual” space than in “real”
EXPLANATION OF A SELECTED FOOTNOTE IN THE TEXT
Footnote 8: Chic Miller’s Chevrolet, a General Motors Corp. (GM) dealership in Bristol, Connecticut, entered into
lending agreements, commonly known as floor financing plans, with General Motors Acceptance Corp. (GMAC) to enable it to
buy new vehicles from GM. In 2001, however, Miller negotiated a better deal with Chase Manhattan Bank. The next year, Chase
declined to provide further financing. Unable to obtain a loan from another lender, Chic Miller’s contacted GMAC, which also
refused to deal. Under a “Dealer Sales and Service Agreement,” GM could terminate a dealership for “Failure of Dealer to
maintain the line of credit.” GM sent several notices of termination, but Chic Miller’s remained open until March 2003, when it
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franchise relationship.” Here, GM acted in good faith, with good cause under this statute to terminate Chic Miller’s franchise.
The dealer failed to maintain floor plan financing, a material requirement under the franchise agreement. The dealer also failed
to conduct sales and service operations for seven consecutive business days, another material requirement under the parties’
contract.
Based on GM’s previous effort to enlist Chic Miller’s in buying out another GM dealership in the area, the dealer
believed that GM was attempting to reduce the number of dealerships in that area from three to two. Would such an attempt,
or even a plan to accomplish this result eventually, constitute “bad faith” on the franchisor’s part? Not in the circumstances of
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What do franchise agreements generally provide with respect to a franchisee’s location and form of doing business?
2. How do franchise agreements generally delegate price and quality controls over the franchisee’s business? Price Con-
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REVIEWING—
SOLE PROPRIETORSHIPS AND FRANCHISES
Carlos Del Rey decided to open a Mexican fast-food restaurant and signed a franchise contract with a national
chain called La Grande Enchilada. The contract required the franchisee to strictly follow the franchisor’s operating
inspect the restaurant monthly to ensure compliance. Nine months after Del Rey began operating his restaurant, a
spark from the grill ignited an oily towel in the kitchen. No one was injured, but by the time firefighters were able to
put out the fire, the kitchen had sustained extensive damage. The cook told the fire department that the towel was
required towels be placed at least one foot from the grills. The next day, La Grande Enchilada gave Del Rey notice that
the franchise would be terminated in thirty days for failure to follow the prescribed safety procedures. Ask your
1. What type of franchise was Del Rey’s La Grande Enchilada restaurant? This is a chain-style business operation.
2. If Del Rey operates the restaurant as a sole proprietorship, who bears the loss for the damaged kitchen? Explain. If
liabilities incurred by the business. Del Rey might have insurance to help.).
3. Assume that Del Rey files a lawsuit against La Grande Enchilada, claiming that his franchise was wrongfully
terminated. What is the main factor a court would consider in determining whether the franchise was wrongfully
terminated? The franchisor’s good faith and fair dealing in terminating the franchise would be the chief factor that a
4. Would a court be likely to rule that La Grande Enchilada had good cause to terminate Del Rey’s franchise in this
situation? Why or why not? If La Grande Enchilada attributes the termination of the franchise solely to Del Rey’s failure
to follow safety procedures, then the termination would be wrongful. The towel that caught fire was about two feet
from the grill, which complies with the requirement that towels be at least one foot from the grills.
DEBATE THIS:
All franchisors should be required by law to provide complete estimates of the profitability of a prospective
franchise based on the experiences of their existing franchisees. Because many franchisors seem only to survive by
selling more franchises—rather than from current operations—they tend to exaggerate the potential profits than can
much profit they can expect to make. To prevent individuals from succumbing to franchisors’ exaggerated sales
pitches, government should require that verifiable estimates of profitability be provided. These should be available in
