Spotting an Accidental Franchise (and Why It Matters to You)

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Imagine you own a successful business with retail locations in several Southern California cities offering desserts in a unique fun-filled party atmosphere operating under the name Dessert Dreams. A Chicago investor vacationing with his family visits one of your locations and enthusiastically proposes entering into an agreement with you to help you open locations in Illinois and a location near his brother-in-law's home in Northern California. He offers to pay $20,000 per location, as well as ongoing royalties for the right to use your business name and system of operation. He tells you he is ready to move forward, but has a meeting scheduled with his partner at a conference in New York and asks you to send him the agreements there.

This all seems like a dream come true. You do not have the time or resources to expand to Northern California, let alone out of state. Licensing the concept to a responsible partner in a remote venue represents “found money” to you. To the businessman from Chicago, it also represents a great deal because he does not have to protect a trademark or develop and test a business concept, yet has seen that the model works and can be successful.

Everyone wins, right?

Not so fast. You are about to violate franchise laws in California, Illinois and New York, all of which require registration of franchise offerings. You are also about to run afoul of the requirements of federal law mandating pre-sale franchise disclosure.

Originally published in The Orange County Business Journal - November 18-24, 2013.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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