Franchising typically becomes the focus of a lot of interest in a down economy. I am not going to belabor the “down” aspect. Suffice to say, when people do not have a job or financial security, interest in franchises, in franchising their business, in buying a franchise and owning their own business skyrockets.
Believe me, the franchise industry understands this. The only brakes on a franchise sales free-for-all right now is that this time around, small business financing and commercial loans are severely limited.
What is a franchise after all?
Everyone understands about McDonald’s but what about flower shops, handyman services, business consultants, or even franchise consultants? Any licensing or distribution arrangement can be a franchise with these three elements:
1) Granting the right to use a trademark, trade name or other
commercial symbol in the sale of goods or services;
2) Providing continuing control or assistance, or prescribing
the marketing plan or system to operate the business; and
3) Requiring payment of a fee, direct or indirect, [typically
includes any purchase from franchisor greater that $500].
The definition is so broad that, not only are many types of business relationships intentionally designed as franchises, but also many can and do fall accidentally into the franchise net.
If you have a business that you want to expand and you don’t have the capital, or maybe you don’t want to run an organization yourself with lots of employees and/or locations, then you will inevitably want to give others some kind of license to use your business format and possibly to sell your branded products/services. Throw in using the same trademark or trade name, and you are in the franchising business. Actually, according to the FTC, it doesn’t even have to be a formal license, it can be just “substantial association” with a trademark or trade name.
Why does it matter if a business opportunity is really a franchise?
It matters to both the buyer and seller of a franchise. There are federal and state laws that protect buyers. Most franchises require a significant investment. A lot of people have put their retirement savings into the purchase of a franchise. The franchise laws, which I talk about a lot in other blogs and on my law firm website, require that franchisor’s/ franchise sellers provide prospective buyers with a form of prospectus called a Franchise Disclosure Document (“FDD”). The FDD has a lot of information about the franchise business, the obligations of franchisee and franchisor, and two years of audited financial statements so that the buyer knows the financial condition of the franchisor.
So if the franchisor doesn’t treat the business opportunity as a franchise and do all the things required by franchise law, the buyers won’t get the information they’re entitled to have. the franchisor-who may or may not understand what they’re doing and violates franchise laws–can end up in a lot of legal trouble and great expense to solve the problem. Far greater than if it was done right in the beginning.
So what’s the big deal? Whichever side of the franchise you might be on, buying or selling, if it’s a franchise and it’s not done right—as in complies with the law, there are both communication and legal problems ahead and the crash will certainly cost everyone money.
