Is your business legally a franchise? It might be, and you might not even realize it. The legal definition is comprised of three tests, and it’s surprisingly easy to find yourself unwittingly the part of a franchise. Here are the three conditions that determine whether or not your business is legally defined as a franchise:
With a definition that’s this broadly defined, many people are surprised to find that they’re already in the business of franchising, and they’re often left with sudden new questions. How did this happen? What does this mean for my business? What are my new legal obligations? These are all good questions, and the answers aren’t often easily found.
Some people embrace this newfound status, and others look for ways to avoid these new obligations. Others still will try to structure their business in such a way that they’re somewhat similar to a franchise, but something else. This allows them to legally avoid some of the new obligations that befall the owners of a franchise.1 This is a tricky proposition, though, and many people find that, despite their best intentions, their business is indeed a franchise.
For some, franchising is the right answer. It’s not the solution for everyone, though, and there are other options for expansion. Let’s discuss a few of them right now.
Expanding as a distributor: This is an option for businesses who have a physical product to sell. If you’d rather focus on manufacturing and you’d like to outsource the sales to someone else, this is certainly an option, and in this regard, it’s not very dissimilar to a product distribution franchise. There are some important distinctions, though, and they mostly involve the level of control you’ll have over your dealers.
If you’re just the distributor and not a franchisor, you won’t have very much control over your dealers. You’ll still be allowed to make shared agreements and compromises with those downstream from you, but you’re prevented from making unilateral decrees. If that’s something you’re after, you can certainly embrace your newfound status and accompanying obligations as a franchise owner, and that might be the best move. It might not be, though, and there are a few important reasons why.
If you’re not specifically a franchise owner, you’re able to bring your products to market more quickly, and without as much legal maneuvering. It’s an easier path, but this is a fine line to walk, and with the slightest of errors, it’s easy to find that your distribution business has unwittingly become a franchisor.
Expanding as a part of a partnership: This is another valid option. It’s quicker to market and easier to set up than a franchise, but it’s also fraught with peril. If you’re not careful, you can find that your limited partnerships or joint ventures are catching unwanted attention from government agencies and franchise-law regulators.
If you have contracts to seed control of many units, but not all of them, you’re likely to find yourself in violation of franchise law. This is particularly true if you’re licensing your trademark as part of these agreements.
Franchising is tricky, but it’s not impossible, and if you find yourself with a business that’s worthy of deliberate significant expansion, you should consider yourself lucky. This is cause for celebration and not panic. This is a time when you should be reflecting on your options, and on what each option means for your business.
A dealership or a partnership is a simpler option. These are less expensive, and the agreements are far less complicated. It’s possible to make this work, but it’s also possible to run afoul of the law when trying to do this, and you might just be delaying your inevitable franchising, or stalling your growth potential. You might be making the wrong choice, and this might expose you or your business to unnecessary risks or legal complications.
It doesn’t have to be this way, and these complications aren’t necessary. Franchising isn’t always easy, but with clear intentions and proper legal representation, it’s possible. And with competent, reputable consultants, it actually is easy.