Creative entrepreneurs come up with unique, profitable business ideas every day.  Some of those concepts rely wholly on the talents of the business owner, like a craftsman or a writer.  But sometimes the business model is easy to duplicate from an operational standpoint – like how a product is made, or what steps employees take in delivering a service.  In this case, an entrepreneur might see the promise of additional revenue by allowing other entrepreneurs to pay a fee to use his or her replicable concept.

Of course, this is a Franchise, and it’s been done for years and in countless industries – from fast food to maid service to tutoring academies to hotels. And Franchise businesses can be very successful when they deliver on the expectation that the products or services are the same, from one location to another that use the same business name and trademark.

The business qualities that legally create a Franchise, however, are not that unusual, and an enterprising business owner may find that he or she has accidentally created a Franchise – without intending to, and without following the proper legal steps.

A Franchise is created, by default , if the following three qualities are present in a business transaction between two entities:

The Franchisor may have created a recognizable name, trademark and brand image for the business through advertising and marketing channels.  In a Franchise, the Franchisor gives permission for the Franchisee to use that trademark or other identifiable marks or designs to promote the Franchisee’s offering of products or services to its customers.

The Franchisor may have established an effective and efficient business model related to production of goods or the provision of services.  In a Franchise, the Franchisor has the right to impose significant controls over the Franchisee so that there is an operational consistency from one Franchise location to another, and the Franchisee will be contractually obligated to run its business accordingly.

n exchange for providing an overlay of marketing and branding for the Franchisee’s business, and for access to the tried and true business processes that made the original business successful, a Franchisor imposes the obligation for its Franchisees to pay either a fee or royalties.

It’s easy to see how an Accidental Franchise could be created.  You come up with a great concept for a business, develop effective and profitable operational processes, spend money to develop a brand identity and purchase advertising to drive in the customers.  And then others want to share in your success – and avoid going through the trial and error that you did.

But if your agreement with these other business owners includes the above three qualities, then you have inadvertently created a Franchise.

The Federal Trade Commission Franchise Rule regulates the sale of Franchises, and numerous states have their own additional regulations.  The Rule mandates that any person or legal entity offering or selling a franchise must provide a franchise disclosure document (FDD) to all qualified prospective buyers (1) at least 2 weeks before the execution of a franchise agreement and (2) before the prospect makes any payment. The FDD is a comprehensive questionnaire on 23 topics about the Franchisor and the opportunity for Franchisees, such as financial status, business experience, fees to be charged, marketing strategies, intellectual property, territories, litigation, among many others, and is generally competed with the assistance of an attorney with specialized knowledge

Over the last few years, I have worked with several clients who have considered licensing their business concept and we have gone through the above exercise to ensure that any potential transaction would not be considered an offer for a Franchise. Operating a Franchise in violation of the Rule is considered an “unfair and deceptive trade practice.” The FTC is empowered to impose fines, recover funds on behalf of those business owners that bought into your Franchise, and require that the purported Franchise Agreement be rescinded.

Licensing a successful business idea to other entrepreneurs can be very lucrative and satisfying.  If you are considering allowing others to use your concept, please give me a call so we can structure any transaction properly and avoid any future legal trouble!

If I can be of assistance as you review your opportunities to expand on your successful business concept, don’t hesitate to call!

NOTE: THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES. IT DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. EACH SITUATION IS DIFFERENT. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE YOUR LEGAL RIGHTS, REMEDIES, AND DUTIES.

By Wendy M. Anderson, Esq.
Law Office of Wendy Anderson, PLLC
480-825-4509
Contact Me Today

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