Saying It’s Not A Franchise Doesn’t Change Things

by Kat Tidd on March 7, 2011

Whether buying or selling, there are two schools of thought:  1.  Being a franchise is good; or 2.  Being a franchise is bad.

Why good?  It has become a more understood method of expansion.  It is true, you can grow a business using other people’s money.  You can buy a “proven” concept with support and know how—if you do your homework and apply critical judgment.   There is a network of common experiences, a community of entrepreneurs with the same focus and desire. There’s an income stream for the franchisor that grows with the success and the expansion of the system.  There is strength in numbers in building a brand.

Why bad?  There are federal and state laws that regulate the sale of franchises—think selling securities—so it’s expensive to put a franchise program together and comply with the law.  Sorry, but there’s no way around paying some real $$$ to get real documents that fit the business model, make sense for the short term and long term plans of the franchise company  AND  actually fully comply with state and federal laws.  Some entrepreneurs practice denial  — “it’s just a trademark license”, “it’s just a business opportunity.”  Then they take shortcuts that shortchange the buyers of the opportunity of the information and protections to which they are entitled.

Well, it is what it is.  If the business model doesn’t fit the overriding FTC definition of a franchise, then at least one legal process and set of documents won’t be needed.  Any time someone is taking money for giving another a right or opportunity to start into a business, there are other potential legal issues — but that’s a different discussion.

But is it a franchise?  Judge for yourself.  The rule is not hard to read.

16 CFR § 436.1  [aka “The FTC Franchise Rule”]  Definitions.

h)        Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:

(1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;
(2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and
(3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.

Authority:   15 U.S.C. 41-58. Source:   72 FR 15544, Mar. 30, 2007.

This is really a simple three part test, and if each of the three parts is satisfied, then you are looking at a franchise with all its rights and legal obligations.

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