The elements necessary to satisfy the federal (and applicable state) definitions of a franchise are very basic. If you allow someone to use your name, charge a fee and provide any kind of assistance or exercise control, you're generally in the franchise zone. Penalties are substantial and far outweigh the cost of doing it right. Do your homework and if you are diligent in researching a workable budget and who is retained, you will find that the cost to do the legal work is paid back after the first one is sold. Good luck!
Kevin B. Murphy, B.S., M.B.A., J.D.
Attorney at Law & Franchise Expert
Director of Operations - Mr. Franchise
FRANCHISE FOUNDATIONS APC
If you are having the others operate under your trademark, take a fee from them of $500 or more for training, products or anything else in the first 6 months of the relationship and require them to operate their business in a certain way, it is likely a franchise under federal law no matter how you try to structure it. In addition there are state franchise laws and federal and state business opportunity laws that may cover your situation and under which you would be required to comply. Your question is way too complex for this venue. You should hire an experienced franchise attorney to advise you. Call me if you would like to discuss your situation - 215-525-1165 x101.
This response does not create an attorney-client relationship and is not intended to provide legal advice for your specific situation.
My colleagues have given you sound advice. You are entering a federal and state regulated area, where the consequences for non-compliance can be severe. The name attached to the business relationship is not the determining factor. As stated, there are 3 elements for concluding that a relationship is a franchise under the Federal Trade Commission rule. Several states have their own definitions and requirements. You would be well served in contacting an experienced franchise lawyer who can evaluate your proposed arrangement and lead you through the maze, so you do not stumble at the outset. It will be time and money well spent.
Based on the basic information you provided, it sounds like your proposed transaction would probably be a franchise under the federal definition of a "franchise" under the FTC Franchise Rule. The existence of state franchise laws with different definitions may add a complicating factor -- depending on where your potential person resides and where the new business would be operated. There may be ways to structure your proposed deal to avoid classification of a franchise (which usually requires consultation with an experienced franchise lawyer). But, more often than not, there are no legal loopholes available without torturing the original contemplated business deal. Please keep in mind that it does not matter what label the parties put on the deal -- if it satisfies the statutory definition of a franchise, then it is a franchise.
If you enter into a franchise relationship without complying with franchise law, then you run the risk of (1) incurring fines and penalties imposed by state and federal enforcement agencies; (2) incurring liability to the franchisee for his or her damages ( and perhaps treble damages) due to your failure to comply with franchise law; and (3) incurring the risk of having the business arrangement rescinded and having to refund any payments you received from the franchisee. Compliance with applicable franchise law completely eliminates these risks.
A common mistake among start-up franchisors is to try to maintain too much control over the business operations, which can lead to unnecessary exposure to additional liability. Consultation with an experienced franchise lawyer can help you minimize your exposure to liability arising from operation of this other business, through appropriate contract provisions (such as indemnification, insurance , and notice of independence requirements) and through proper limits on your control of the business's operations.
Vinson Franchise Law Firm
This response provides general information only. Nothing included in this response should be construed as creating an attorney-client relationship, or as the provision of legal advice.
I am in agreement with my colleagues. See the article at the link below. It gives you a good idea of how, even with good intentions, a business enterprise can be considered a franchise under the law.