How can you possibly be a franchise or create one without intentionally doing so? It can happen easier than you realize. Franchise laws are so complicated and far-reaching that you can end up creating one even if your agreement with the other party specifically says that you are not a franchise.
What does it mean to be a franchise?
While there are a lot of ins-and-outs between federal and state laws, the Federal Trade Commission (FTC) says that a franchise exists whenever one business party (the seller):
- Gives the other party the right to operate their business in a way that is associated with or identified through the seller’s trademark
- Has the ability to exert authority and control over the other party’s operations or provides significant assistance with those operations
- Requires the other party (the franchisee) to make a payment (or agree to do so) for the privilege of using their trademark or assistance
State laws can further complicate the issue because they’re not preempted by the federal rules.
What’s the problem if you are an accidental franchise?
Eventually, you’re bound to run into issues or disagreements with the other party, whether you’re the franchise’s seller or the franchisee. Some of the most common problems include:
- State or federal investigations and penalties if the government finds out that you’re operating a franchise below their radar
- Lawsuits by the franchisee against the seller for violating regulations that apply to franchises and falling subject to fines, damages and other civil penalties
- You violate franchise relationship laws when you try to terminate the relationship or change it and end up creating a huge legal tangle
Franchises are definitely not a bad thing. They’re a proven way to enter a market and benefit both the seller and franchisee alike. But an accidental franchise can be problematic if you don’t know what you’re doing or don’t want to have that relationship. Find out how experienced business advice can help you avoid painful financial consequences and damage to your reputation.
