by iFranchise Group
CEO, Mark Siebert
The Ultimate How-To Guide on Franchising Your Business
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So let’s talk a little bit about what exactly is franchising, let’s start with that as a starting point. Franchising is a legally defined term. Franchising is three things according to the federal government; it is the use of common name or trademark, the provision of significant operating assistance to a franchisee or exercise to the significant operating control and the payment of a fee. If you have those three things, you’re a franchise, it doesn’t matter what you call it, you can call it a license or business opportunity, it’s a franchise. So it’s important to understand our definition of a franchise is based on the federal definition of a franchise.
Now there’s some state definitions too, some different states will have some regulations relative to what they call a franchise but there all really similar in terms of what the definitions are. So bottom line is if it has these elements it’s a franchise.
To answer, one must look closely at the definition of a franchise.The definition of franchising helps businesses determine if they are qualified to operate as a franchise. 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.
According to FTC Rule 436, “This element will be satisfied only 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.
FTC Rule 436 lists 18 specific 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 franchise operations manual.
According to Rule 436, “The franchisee must be required 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.
WARNING: Some companies are franchising and don’t even know it! And there are significant penalties for violators.
As a franchise, you are required to provide prescribed disclosure documentation to prospective franchisees at the first 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.
In summary, franchising a business consists of the following responsibilities for the franchisor:
In turn, the franchisee will:
McDonald’s, Massage Envy, Ace Hardware and Subway are just some successful franchises operating in the U.S., and in some cases internationally.
Franchising your business as a growth strategy has significant benefits. In fact, franchising is one of the fastest means for expansion without using your own capital. Learn all about the main advantages of franchising, and see if it’s the right fit for your business. Or, request your free consultation with an expert franchise consultant today.
If you would like to learn more about FTC Rule 436, along with some additional information about franchise legal requirements and franchising in general, please email us at [email protected] and provide us with your contact information, call us at 708.957.2300, or simply fill out an inquiry form on this website.
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“International expansion is of tremendous importance to us. The iFranchise Group helped us negotiate a license in Japan worth millions, and their input has been vital on structural and planning issues.”
– Dan Olsen, Vice President, International, Ace Hardware