Once you begin expanding your business by using investors you must be careful that you’re not crossing the border into franchise territory. The definition of a franchise is an authorization by a company to a third party enabling them to carry out specified commercial activities, use their trademark, and follow their business model. In exchange for that authorization, the third party compensates the company with fees and royalties. If you are intertwined in a business partnership that meets this criterion, you may accidentally have started franchising your business.
While there are many benefits to franchising your business, an accidental franchise could get you into deep water. If you are providing an investor with a ‘license’ to use your business model and are requiring training and providing support, then technically you are a franchise. There are legal repercussions to operating like a franchise and you could be subject to hefty fines. Franchisees have rights of their own that could allow them to revoke their contracts, as well as the right to take further legal proceeding. You may even be culpable of a felony, in some states.
If you’re concerned that you may be crossing into franchise territory and want to make sure you’re legally in the clear, follow these simple steps:
- Control is in the hands of the business owner or licensee.
- There are no limitations on marketing and distribution of the products/services.
- Training is limited to the knowledge of the product/service.
If you feel that you have crossed into franchise territory, then you might want to contact your attorney or give us a call. We can provide you with a litmus test to help you assess whether or not you are a franchise.