Growing Without Franchising
by Larry Slusser on April 9th, 2008
You have a great business idea and you put it into action. The result is a nice little opportunity that your friends and business colleagues tell you would be a great franchise. The decision to franchise is not one to take lightly. First you need to understand what a franchise is and what other alternatives you have available to you.
The federal government defines a franchise as a business relationship that has 3 specific characteristics. Number one there is a common trademark. Number two, there is a level of operational support or help and training and one company has significant operating control over another company where in decision making or operational policies and procedures. Third, the franchisee pays a minimum of $500 in the first six much for any fees, royalties, shared advertising costs, training fees, or equipment fees.
Being classified as a franchise means that your business is subject to State and Federal laws which spell out specific operating guidelines for disclosure, time periods for buying and selling franchises, and other regulatory requirements. If your business only has 2 of the 3 characteristics of a franchise then you are not considered a franchise and not subject to the stipulated regulations. Before you go trying to not incorporate one of the three main features of a franchise think carefully about how this characteristic will impact your business.
* Common Trademark is a difficult piece to circumvent. One of the advantages of a franchise is the marketing synergy you gain when you have franchises. Brand name and recognition all increase when you have the same name of business. Trying to circumvent this and having companies with separate names causes you to lose the branding you gain through franchising.
* Operational Support & Control is one of the key advantages of a franchise. McDonald’s is perhaps the most famous example of this. Because of Ray Kroc’s fanatical insistence on standardization a McDonald’s cheeseburger is the same in California as it is in Rhode Island. Growing your market segment through similar businesses you have no control over is a difficult proposition.
* $500 in charges in the first 6 months seems easy enough to get around, just delay the payments. This work around has been tried literally and in a court of law. While laws vary from State to State cases have been brought before the court regarding the delaying of franchising fees and the bottom line is if it looks like a franchise, operates like a franchise, but delays fees and royalties for however long it is still a franchise. Additionally, you would have to be very very comfortable with someone to let them operate under your trademark, with your policies and procedures, for at least 6 months at no charge for anything or essentially no charge(less than $500).
While it is possible to grow your business without franchising you need to be very careful and pay particular attention to all applicable laws. Before considering stepping out in this direction check with your attorney and tax professional to ensure you are compliant with all State and Federal Laws.