At some point, every business owner says “I would like to franchise my business” and begins to entertain the idea of franchising. The simple truth is that any business and any idea can be franchised. Legally, all that is required of a business in order to franchise is the completion and filing of the proper documents known collectively as the Franchise Disclosure Document or “FDD” (learn about the different Elements of a Franchise Disclosure Document). If franchising is to be used as the springboard for branding, market expansion and growth; then it is important to understand the true definition of a franchise relationship.
The FTC Rule
Under the Federal Trade Commission (or FTC) Franchise Rule (16 CFR Part 436, referred to from now on as the “FTC Rule”) a franchise is defined to include a relationship that has these three elements:
- The buyer (franchisee) must use a common name, or to offer, sell or distribute goods, services or commodities that are identified or associated with the common name (trademark). In other words, the franchisee must do business under the same name as everyone else in the system;
- The franchisee must operate the business in the same format as the seller of the business dictates. Basically the seller of the business (franchisor) has significant control over the method of how the business should be operated while providing ongoing operational and marketing assistance (find out if franchising is for control freaks); and
- The person purchasing the business is required to make ongoing payments to the seller of more than $500 per year as a condition of commencing operation of the business, otherwise known as a royalty (check out our article to learn more about royalties). This required payment does NOT include any payments for the purchase of goods and/or products purchased from the franchisor. As a side note, in most circumstances (for consistency, quality and control) the franchisor requires the franchisee to sell certain products that must be purchased either directly from the franchisor or approved vendors or suppliers (this is one of the ways How You Can Make Money When Franchising).
Each of these three elements must be present for the FTC Rule to apply. When all of these elements are present, then the business relationship is defined as a franchise regardless of any disclaimers, waivers, releases or acknowledgments that may have been creatively crafted explaining that the business relationship is not a franchise (see other growth options when considering expanding your business). In fact such things have proven to be counter-productive and dangerous because they may disclose evidence that the seller of the business had some insight or knowledge of the likeness of the business relationship to the definition of a franchise. Further information regarding the FTC Rule can be found at https://www.ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/franchise-rule.
What Are You Looking to Accomplish
So does all this mean you should go thru the steps to franchise your business? Well it really depends on what you are looking to accomplish. If you have the resources and talent to open more locations yourself then growing organically may be your best bet.
However if you do not have the resources and want someone else to take on the responsibility of getting another location up and running then franchising may be for you (take a look at this article Open More Locations OR Franchise).
It also depends on what is your end goal (take a look at “What is Your End Game“). While franchising is a good way to get your business into other markets rather quickly, it does come with a set of rules.
In order to franchise anywhere in the United States, the entire relationship needs to spelled in a set of documents (take a look at “How to Franchise Your Business in the United States“). these documents are called Franchise Disclosure Documents (FDD) and lays out all the rules of the road. What is in the FDD and how it is laid out is all regulated by the FTC in the spirit of transparency and keeping the franchisor honest.
Hopefully this helps you better understand the definition of a franchise. To learn more about franchising and what it will take to franchise your business, give us a call at 1-877-615-5177 and we will be happy to answer all your questions!
- The Benefits of Franchising
- Who Can Help Franchise Your Business
- What is the Definition of Franchise Development
- Can My Professional Business be Franchised
- How to Franchise
- Franchise a Restaurant
