Definition of Franchising
In the U.S., the Federal Trade
Commission and state regulatory agencies have developed a formal set of
disclosure requirements and franchise-specific prohibitions that franchisors
must follow in their relationships with their franchisees. To determine whether
or not a business meets the definition of a franchise, under the Franchise Rule, the Federal Trade Commission applies
three definitive criteria that are
summarized below:
1.Trademark -- According to FTC
Rule 436, "This element will be
satisfiedonly when the franchisee is given the right to distribute
goods and services which bear the franchisor's trademark, service mark, trade
name, advertising, or other commercial symbol."
Note that it is the right, not the obligation, which
triggers the
first element of the franchise definition.
2.Use of "significant control or assistance" -- FTC Rule 436 lists 18specific criteria in the
area of significant control or assistance, any one of which may trigger the
second element of the definition. Some of these elements include site approval,
site design or appearance requirements, specified hours of operation, accounting
practices, personnel policies, required promotional campaigns, training programs, and the provision of a
detailed operations manual.
3.Required Payment --
According to Rule 436, "The franchisee must
berequired to pay the franchisor (or
an affiliate of the franchisor), as a condition of obtaining or commencing the
franchise operation, a sum of at least $500 . . . within six months. . ."
Required payments include franchise fees, royalties, or even from
training fees, bookkeeping charges, payments for services, rent, or even from
product sales (if they are sold above a bona fide wholesale price).
If you are contemplating a business relationship which
involves all three of these criteria, you are contemplating a franchise -
regardless of the label you choose to use for your business
relationship.
As a
franchise, you are required to provide prescribed disclosure documentation to
prospective franchisees at the first face-to-face meeting during which the sale
of a franchise is discussed. Failure to provide this documentation may result in
fines of up to $10,000 per violation at the federal level. Moreover, in some
states, the violation of franchise laws is actually a felony.
WARNING: Some companies are franchising and don't even know
it! And there are significant penalties for violators.
