When you think of a “franchise,” images of chain restaurants often come to mind. However, franchises can take all shapes and sizes, and they can apply to all sorts of business concepts. In fact, sometimes a business arrangement is a “franchise” without the parties even intending it to be one. So what, then, is a “franchise”?
Under the federal franchise rule, a franchise generally involves three elements: (1) the right to operate a business using a franchisor’s trademark, (2) the franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and (3) the franchisee makes a required payment (currently $735 or more) within six months after starting business. Some states have their own spin on this definition.
If a business arrangement is considered a franchise (and does not fall within any exceptions), there are requirements for pre-sale disclosures and, in some states, registration.