Small Biz Franchise Blog

Franchising: what is it, really?

Posted on July 7, 2009 by Lizette Pirtle

The Federal Trade Commission has created criteria to determine whether or not a business meets the definition of a franchise under their Franchise Rule. They basically look at three factors: granting of trademarks, control over the new location or training provided, and payment of funds. To know whether your business is or will be deemed a franchise ask yourself the following questions:

1.     Trademark

• Do you want to grant the right to others to distribute goods and services bearing your trademark, service mark, trade name, advertising, or other commercial symbol?
• In other words, do you want the new locations to use your business name and display your logo?
• Are you okay with the locations not trading under your name yet offering your products and services? 
   

2.    Significant control or assistance

• Do you want to have significant control over the way others operate their businesses? For example, do you want to approve the site, the design and the appearance of each location?
• Do you want to dictate the operating hours, the accounting practices as well as other business practices?
• Do you want to ensure that all locations follow and use the same promotional campaigns?
• Or, are you okay with every location doing their own thing, choosing whatever they want to look like, serving customers whenever and however they chose?

OR

• Do you want to provide assistance to the owners of the new locations?
• For example, do you want to provide training programs that will teach others how to obtain and serve clients?
• Do you want to provide operations manuals detailing how others should operate their businesses?
• Or, are you okay with them figuring out how to run the business as they go?

3.   Required Payment

• Do your want others to pay you an upfront fee larger than $500 to access your knowledge and open a location?
• Do you want others to pay you ongoing fees as royalties, training fees, bookkeeping charges or other payments for services, rent, or even from product sales?

If you are considering entering or have entered into a business relationship which involves ALL three of these elements, you are contemplating or are operating as a franchise. You can call it what you want but by the Franchise Rule as specified by the Federal Trade Commission deems your business a franchise. And, as a franchise you are required to provide a disclosure document to those people who wish to enter into a business relationship with you (prospective franchisees). If you fail to provide such a document, you are subject to fines up to $10,000 per violation at the federal level. What’s worse, in some states, violation of franchise laws is considered a felony.

Related Posts

1. Franchising – Federal (FDD) vs State Registrations
2. Is the Name of your Business Protected?
3. Zors, Zees and other Franchising Lingo
4. Is Franchising a Good Exit Strategy for Small Business Owners?
5. The Role of Press Releases in Franchising