BUSINESS WATCH

A FRANCHISING PRIMER:   What Business Owners Should Know About Franchising By Andrew T. Schlosser

 

Most business owners are familiar with the concept of franchising and will quickly point out their favorite fast-food restaurant as a prime example of a franchised business. When looking at your own business expansion plans, however, it is often easy to overlook franchise issues and assume franchise laws are inapplicable. Since failure to comply with various franchising laws can result in costly litigation, a loss of profits, civil fines, or even jail time in some circumstances, it pays to know some of the basics about franchising before your expansion plans are finalized.

 

What is a Franchise?

As noted above, most people tend to think of fast-food restaurants as the typical franchise, but any type of business can actually be a franchise. This is because the definition of a franchise focuses not on the type of business being transacted, but instead looks to how the business relationship is structured.

 

Under federal law, a business will be considered a franchise if it meets three main requirements: (1) there is a distribution of goods or services that are associated with another person’s trademark or trade name; (2) there is significant control over, or significant assistance provided to, the person distributing the goods or services; and (3) at least $500 is paid to the person granting the distribution rights within six months of commencing business operations.

 

Under the trademark portion of the definition, any commercial name or symbol identifying the person or product will satisfy the test, regardless of whether the name or symbol is officially registered as a trade mark or service mark. In other words, if you are granting someone the right to use your business name, your product name, or your service name, you have met the first part of the franchise definition.

 

The third part of the franchise definition is also easily met, since nearly any payment will go toward the $500 minimum requirement. The franchise fee does not need to be an up-front payment, but can be a percentage of profits, a payment for supplies or equipment, or even a payment for advertising. The minimum payment requirement may also be met if a commitment is made for future payments, even if no payments are actually made within the first six months of operation.

 

The most important part of the franchise definition, since it is the part most open for interpretation, is the second part of the definition, requiring significant control or significant assistance by the person granting the business rights. Significant control has generally been interpreted to require more than simple enforcement of minimum quality control standards or sales quotas. On the other hand, significant control may result from seemingly minor efforts to maintain a uniform look or feel at different business locations. To make matters even more confusing, when determining whether significant assistance is provided, it may be necessary to consider the business background and experience of the person to whom you are granting the business rights in order to determine their expectations of assistance. Thus, if your expansion arrangement provides for any degree of assistance or control whatsoever, you will likely need a more detailed analysis of the franchise laws than can be provided in this brief article.

 

In additional to traditional franchises, federal franchise laws also apply to business arrangements where there is no trademark involved, but the person granting the business rights agrees to assist the purchaser by providing outlets, accounts, or locations for the sale of goods or services. A common example of such an arrangement is the sale of a vending machine route where the location of the machines has already been fixed and the person purchasing the route only needs to stock and service the machines.

 

The Web Site of Fitzgerald, Schorr, Barmettler & Brennan, P.C., L.L.O., the Omaha law firm with over a century of experience and solutions