What is a Franchise?
A franchise is a legal term of art and a business expansion method or system. Under the Federal Trade Commission's ("FTC") Franchise Rule, there are 3 elements of a franchise:
1. Trademark. The franchisor grants to the franchisee the right to distribute goods and services under the franchisor's trademark, service mark, trade name, logo, or other commercial symbol.
2. Significant Control or Assistance. The relationship between the franchisor and the franchisee is one where the franchisor has significant control of, or provides significance assistance to the franchisee’s method of operation.
3. Payment of a Fee. The franchisee is required to pay the franchisor at least $500 either before (or within 6 months after) opening for business. These can include franchise fees, royalty fees, training fees, fees for services, and payments from the sale of products (unless sold at bona fide wholesale prices).
If all 3 elements are present, then the business relationship between the franchisor and the franchisee meets the legal definition of a "franchise" for purposes of the FTC Franchise Rule.
To legally sell a franchise in Washington, the franchisor must register with the Department of Financial Institutions. Some people prefer to avoid this requirement, so they seek alternatives expansion models. To avoid being an accidental de facto franchise, avoid one of the 3 elements listed above.
Here are two common expansion models that some owners use to avoid being an accidental de facto franchise:
In a distributorship, the distributor does not usually pay a fee for the right to distribute the product or services involved. The distributor usually purchases the goods in bulk at a bone fide wholesale price.
In a distributorship, the distributor usually:
• has a contractual relationship with the supplier of the goods;
• purchases in bulk from the supplier at a bone fide wholesale price and sells in smaller quantities;
• has a good information on the local markets and customers for the goods;
• can do business with many companies, and more than just the supplier;
• may or may not receive support and training from the supplier/producer like a franchisee.
In a licensing relationship, the licensee pays a fee for the right to use a particular trademark. But, unlike a franchise where the franchisor has control over the franchisee’s operations, a licensor only collects royalties for the use of the trademark, and has contractual control governing the use of the trademark license rather than influencing the operations of the business.
Contact Mark D. Walters