Reviewing Franchising and Business Opportunity Fundamentals

by Kirton McConkie PC
Contact

Utah Business - February 2014

After creating a successful business model, expansion becomes the next natural step. But such growth usually requires the involvement of third parties, especially if resources are limited. There are several ways to expand your business including franchising, licensing, business opportunities, joint ventures and independent distribution. Each has its pros and cons as well as levels of complexity.

As franchising often seems like an overly involved approach, many business owners choose what they perceive to be an easier business model to begin expanding. While licensing or distributor arrangements may seem less involved, simply declaring that you operate under one of these alternative models does not necessarily make it so. What determines whether a business is a franchise or business opportunity requiring certain legal disclosures depends on the nature of the relationship, not what the owner calls it.

Over the years, we have helped clients untangle business relationships that, although called something else, included elements of a franchise or a business opportunity. Whether a company is non-compliant with federal and state laws or regulations from the beginning or inadvertently crosses the line into franchising or business opportunities later on, the consequences can be substantial.

Federal law requires  franchisors to provide disclosures to potential franchisees that include 23 specific items. On the national level, franchising is regulated by the Federal Trade Commission (FTC). Additionally, there are formal franchisor registration requirements in 14 states. While Utah does not have state-specific franchise regulations, the states in which you hope to expand may be regulated at the state level. If a franchise location is in a registration state, you must follow both the FTC disclosure requirements as well as the state's registration and regulations.

WHAT IS A FRANCHISE?

There is no universal definition of a franchise between federal and state law, which makes it even more confusing to determine whether or not you are a franchise in various states. But generally, the definitions have three elements in common. If you currently operate a multi-location business and these elements apply, then  you are likely operating a franchise subject to regulation:

  1. Seller provides a trademark or other commercial symbol.
  2. Seller exercises significant control or provides significant assistance in areas such as business operations, management, training and/or marketing.
  3. Seller requires a payment of $500 or more during the first six months of operation.

WHAT IS A BUSINESS OPPORTUNITY?

The sale of a business opportunity is governed by federal disclosure laws as well, with additional requirements in 26 states, requiring registration in some states including Utah (Utah Code Ann. § 13-15 and Utah Admin. Code Rl52-15). While each state defines a business opportunity differently, the FTC defines a business opportunity as an agreement between two independent parties under which the:

  1. Seller enters into a new business with an independent party.
  2. Seller requires a payment (no dollar limit under FTC rule).
  3. Seller makes representations to provide business locations, lead generation, training or other customer-finding activities and/or provides a buy-back of products or services.

REVIEW YOUR AGREEMENTS

The key elements for both franchising and business opportunities are very similar, particularly regarding operational or marketing assistance, making it difficult  to distinguish between these. two business models. Allowing a buyer to use a trade or service mark is generally the unique feature of a franchise.

The more a buyer  relies on the seller's control or assistance, the more likely the need for compliance with franchising or business opportunity regulations--and in a dispute about the nature of a relationship, seller control or assistance is not difficult to find.

As a business  relationship evolves, owners may feel compelled to help struggling licensees or distributors succeed. It is at this juncture where the line  into  franchising  is  often  crossed.

Even a trademark license under which the licensee pays more than $500 in the first six months of the agreement may actually be a franchise if the seller offers significant assistance marketing the product. An independent distributor may actually be a franchisee if the seller provides training, marketing and/or site-selection services.

If you have agreements with third parties involving the sales of your products or services, the following steps may help ensure you have not accidentally sold a franchise or business opportunity:

  1. Pay attention to the nature of all agreements you have already made or make in the future involving distribution of company products or services.
  2. Review the terms of any agreements you have to see whether any of the three elements of a franchise or business opportunity apply.
  3. If you have any doubts about whether you are or should be operating as a franchise or business opportunity, seek legal assistance. Although penalties and fines may apply for non­ compliance, it is often less costly to proactively contact the FTC and state regulators to explain your situation. 

Ideally, understand and determine the best structure for your business concept before you launch your expansion or write your growth plan. If you even think you may need to exert control over how your products or services are sold, you should seek qualified legal advice to make sure you are set up for a long and compliant future.

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.

© Kirton McConkie PC | Attorney Advertising

Written by:

Kirton McConkie PC
Contact
more
less

Kirton McConkie PC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.