How To Franchise Business
Is Your Business Already Legally a “Franchise”? As expected, because of the financial, legal and time commitments associated with franchising, business owners frequently look for other methods of expansion that closely approximate the franchise model without failing (knowing or unknowingly) the FTC’s franchise definition test in order to avoid complying with the federal and state requirements for franchising. Further, in the majority of these cases, the owner has in fact, developed and is distributing a “franchise”, all the while incorrectly insisting that their business is NOT a franchise and they are not obligated to comply with franchise distribution law(s). As expected, most are not happy hearing that they are a sitting duck for a franchise law violation(s) and the target of possible criminal and/or civil charges and damages.
The methods referred to take many forms, however, the most common include dealership, distributorship, partnership and limited partnership, joint venture, association and licensor. While each of these expansion methods do have their place, and may in fact, be the best choice for your business, the caution comes in selecting one of the above and the subsequently creating a “franchise” model through the final execution of the model specifics. Specifically, a business is legally defined as a franchise if it meets the following three tests:
1. Allows the buyer to use your company name or logo;
2. Charges a fee to the buyer (inside or outside of product or service);
3. Provides any significant assistance or maintains any significant control over any part of the business.
Clearly, these testing statements are broad in scope, and it is easy to see how difficult it is to expand your business, through outside investment, without failing to affirm the three simple tests above. Owners frequently either make the mistake of developing a franchise model without their knowledge of the law, or intentionally design a system “on the fence” of these franchise litmus tests, often times failing them, when a close examination of the business model is performed. Looking at each expansion alternative more closely, we can quickly conclude the material advantages and disadvantages of each.
The structure of Dealership and Distributorship expansion options generally limits their use to businesses that manufacture or distribute a physical product.
Licensor options can be applied to both service and product business types. Both structures consist of a shared agreement of compromises, as the ability to unilaterally control all agreement options is limited exclusively to franchise agreements.
For this reason, you have to be prepared to engage in a relationship with little control over what happens to your product, or how your service is executed once it resides under the control of the dealer, distributor or licensor. The advantage to these expansion options are the speed to market, and limited legal complexities; however, the tendency to impose control or provide material support will likely push these models into the definition of a franchise very easily.
Further, with all expansion alternatives, the allowed use of your trademark is a further qualifier to the franchise test rules. So, if you are considering any expansion alternative to franchising that closely breaches the fringes of the three tests listed above, including the option to use your registered (or otherwise protected)trademarks in a contract relationship, it will likely ensure your business is unwillingly, yet legally, considered a franchise.
Partnerships, Limited Partnerships and Joint Ventures are also an extremely limited expansion method, as is required in order to avoid the auspices of franchise law, the partner(s) must own control to “all” of the units or locations.
By contracting with numerous owners for control in one or more, but not all units, it is essentially certain that government agencies will find sufficient evidence to justify a franchise law violation. This is particularly true if a shared trademark is involved in the agreement rights. Again, like dealer, distributor and license agreements, partnership agreements are relatively simple to construct, but a long shot in an effort to avoid franchise law and compliance requirements in most realistic expansion executions.
If you are fortunate enough to have developed a business that is worthy of deliberate significant expansion, that is cause enough to celebrate. However, expanding improperly, without proper legal representation or without clear intention, will not only put your existing business at risk, but can also victimize your growth if the wrong expansion vehicle is utilized.
Whether you choose to franchise, or not, be certain of the reasons and associated risks for each expansion option. Franchising, although superior in many cases, is not always the best expansion choice. Many times, your objectives can be met using significantly less expensive and far less complicated agreements. Similarly, when franchising is the best or necessary choice for expanding your business, trying to skirt the legal and regulatory requirements will likely only delay your having to franchise in the end, and can expose you, your business and your nvestors to unnecessary risks and legal complications.
The best way to determine the best course of action for your business is to consult with competent, reputable consultants and/or attorneys with a strong operational and business acumen
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