The Components of a Franchise: Knowing When to Franchise Your Business
You started as an entrepreneur, hoping to franchise your business someday in the United States. You have gone through the creation and founding process and now have a successful and vibrant business. Now, you are getting requests from friends, family, and customers to open and run a location of their own.
Before you say yes to those well-meaning requests, you must know when to begin franchising. Therefore, keep reading this blog to know what a franchise entails and how to know it is time to start.
What Does It Mean to Franchise a Business Legally?
From a legal standpoint, franchising is a business model, not an industry – although many describe it as an industry. Before venturing into franchising, one must understand what it means to franchise a business in the United States. Nearly all industries have franchise concepts, including bars and grills, hotels and hospitality, health, fitness, wellness, and automotive.
One rapid way to grow a brand is by franchising it as a business relationship. It enables the brand to penetrate new markets and leverage investment from the energy of franchises and capital infusion.
Components That Make a Franchise
The legal definition of a franchise hinges on three things; it is only called a “franchise” when these three components feature. If these three things exist in a business structure, it is legally a franchise. The components include fee structure, trademark, and control – let us consider one after the other.
- Fee Structure
The franchise must require payment of a minimal fee to the franchisor. The fee structure element is satisfied when the licensor charges any fee beyond a de-minus threshold. Furthermore, the fee must include initial upfront fees, software subscriptions, ongoing royalties, and training fees.
- Trademark
The trademark refers to the licenses the franchisee must obtain to distribute the franchisor’s goods or services. Franchising involves getting a license to distribute under or operate using the franchisor’s trademark slogans, logos, symbols, and names.
- Control
The last element is control, where the franchisor is authorized significant control over the licensee. Also, the franchisor is responsible for providing a marketing plan and significantly assisting the franchisee in business operations. The franchisor also exerts significant control over how the franchisee operates the franchise.
- Accidental Franchising
While franchising is an avenue for brand expansion, it is a highly regulated business endeavor. Hence, a brand owner must commit seriously to launching a franchise system. However, some do not like to use the term “franchising” and instead give their business structure another name.
Other names a franchise owner may call their franchise include a joint venture, sales agency, license, direct selling, partnership, or distribution. Nevertheless, regardless of the name, if a business fulfills the definition of a franchise, it is legally a franchise in the US. In other words, if it has all the three elements stated above, it is a franchise under state and federal laws.
“The characterization of business matters because the federal government and several other states regulate franchise offerings and sales,” says Attorney Jason W. Power of Franchise.Law. Therefore, non-compliance with those franchise laws can mean asset freeze, rescission of obligations, monetary penalties, criminal liability, and other legal consequences. “Accidental franchise” requires curative measures if one fails to map out the legal strategy before the franchise offers properly.
Also Read: How to Choose the Perfect Designer Jewelry for Any Occasion
Conclusion
If you are thinking of turning your business into a franchise in the United States, you should strategize. Strategizing with franchise legal counsel may help you determine the most logical path for full compliance.
