Critical Elements in Developing a Franchise
In my over three decades of experience in franchise development, I am often asked “What makes one company succeed in its franchise development while another doesn’t?”
Rarely is there a single reason for success or failure in franchise development. Here, I will use my experience in franchise development to address some of the factors that determine success.
As a professional in franchise development, I am often asked questions such as “Why do I have to go through all the hassle of franchise development? Wouldn’t it be easier to just call my business a dealership or joint venture and skip all the legal requirements of franchise development?”
The answer to such questions lies in the legal definition of a franchise. Over the years, the courts in the U.S. have determined that there are three elements of a franchise:
- The use of a common name
- The payment of a fee
- The rendering of substantial assistance
The courts have reasoned that completing the franchise development process is not very difficult. Literally thousands of companies in the U.S. have successfully navigated franchise development. There are a number of safeguards built into the franchise laws to protect both franchisees and franchisors. Therefore, in order to afford these benefits to the parties involved, the courts will often be very liberal in ruling that a particular business relationship is a franchise.
In one court case, the payment of a fee as little as $500 was upheld as meeting the legal definition of a franchise. The element of “the rendering of substantial assistance” has been met by one company helping a “licensee” develop a marketing plan.
If the courts rule that the relationship is not a franchise, the purchaser of the business opportunity has very few legal rights. Therefore, courts will often bend over backwards to call the relationship a franchise in order to give the purchaser legal rights.
If you are contemplating offering business opportunities that share a common name, involve the payment of a fee and include your helping the purchaser, then I would advise you to carefully explore whether you are offering a franchise and should properly complete the franchise development process.