Essentially a franchise is a business expansion model where a business owner (“franchisor”) licenses its name and business model to another party (“franchisee”) who becomes an owner of its own business subject to the assistance, controls and restrictions of the franchisor.

Under federal law a franchise relationship exists if three factors are present

  • The license of a trademark. The franchisee is given the right to market and/or sell products or services under the franchisor’’s trademark, logo, or commercial symbol.
  • Significant control or assistance. The franchisor maintains significant control over the franchisee’’s business or provides significant assistance to the franchisee in the operation of the franchisee’’s business. Examples of such control or assistance are:
  • Site approval
    Site design or appearance requirements
    Imposing operating hours
    Establishing production methods and standards
    Imposing mandatory accounting practices (likely here re bank account)
    Mandating personnel policies and practices
    Promotional campaigns requiring the franchisee’s participation or financial contribution
    Restrictions on customers
    Location or sales area restrictions
    Formal training programs
    Site selection assistance
    Operating advice (e.g., providing a detailed operations manual)
    Providing management, marketing, or personnel advice

  • Required Payment. For the trademark license and the assistance discussed above, the franchisee makes payment to franchisor in an amount of at least $500. Payment includes any license fees, royalty fees, training fees and other payments for products and services.

Note that if these three factors exist, then the relationship is subject to federal franchise laws regardless of whether the parties intended to create a franchise as what it is called. Keep in mind that there are also state laws which define “franchise that may differ.”

These state laws may not be more narrower than the federal laws- in other words, if federal law says it’s a franchise, then it’s a franchise regardless of state law. However state law can define “franchise” more broadly to include relationships that would not otherwise be considered franchises under federal law. There are also state business opportunity laws which may be applicable to your offering even if it is not considered a franchise.