Crossing the line: reviewing franchising and business opportunity fundamentals.

AuthorWright, Lee
PositionFranchise Law

After creating a successful business model, expansion becomes the next natural step. But such growth usually requires the involvement of third parties, especially if resources are limited. There are several ways to expand your business including franchising, licensing, business opportunities, joint ventures and independent distribution. Each has its pros and cons as well as levels of complexity.

As franchising often seems like an overly involved approach, many business owners choose what they perceive to be an easier business model to begin expanding. While licensing or distributor arrangements may seem less involved, simply declaring that you operate under one of these alternative models does not necessarily make it so. What determines whether a business is a franchise or business opportunity requiring certain legal disclosures depends on the nature of the relationship, not what the owner calls it.

Over theyears, we have helped clients untangle business relationships that, although called something else, included elements of a franchise or a business opportunity. Whether a company is non-compliant with federal and state laws or regulations from the beginning or inadvertently crosses the line into franchising or business opportunities later on, the consequences can be substantial.

Federal law requires franchisors to provide disclosures to potential franchisees that include 23 specific items. On the national level, franchising is regulated by the Federal Trade Commission (FTC). Additionally, there are formal franchisor registration requirements in 14 states. While Utah does not have state-specific franchise regulations, the states in which you hope to expand may be regulated at the state level. If a franchise location is in a registration state, you must follow both the FTC disclosure requirements as well as the state's registration and regulations.

WHAT IS A FRANCHISE?

There is no universal definition of a franchise between federal and state law, which makes it even more confusing to determine whether or not you are a franchise in various states. But generally, the definitions have three elements in common. If you currently operate a multi-location business and these elements apply, then you are likely operating a franchise subject to regulation:

1) Seller provides a trademark or other commercial symbol.

2) Seller exercises significant control or provides significant assistance in areas such as business operations, management, training...

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