We often talk to people who were told they could avoid the regulations of franchising if they simply granted a “license,” or entered into a “consulting agreement,” with a person who approaches them about opening a similar business. Be very wary of such advice; in most cases, these are unregistered franchises that can expose you to significant liability. As they say, “if it quacks like a duck…”.There are three elements to a franchise, and if a business relationship has all three elements, it is a franchise, and subject to all the laws of franchising, regardless the name the parties give to it:
- Right to use a name or logo – If you enter into an agreement that allows somebody to use your name or logo in the operation of a business, or to sell goods that bear your trademark, you have met one element of a franchise. This is true even if use of the name is optional.
- Payment of a fee – If you charge someone a fee as part of a business relationship, you have met the second element of a franchise. You might call it a license fee, a territory fee, a consulting fee, or even a training fee, but if you charge a fee, you have met the second element. The only exception of note is for the purchase price of goods for resale, and then only if the price is a bona fide wholesale price and the quantity purchased is the amount a reasonable business person would purchase for an initial inventory. However, if other fees are charged, then the second element of a franchise will have been met.
- Significant assistance or supervision – If you provide training in the operation of the business, you will have met the third element of a franchise. Likewise, if you provide operating standards that must be met by the other person, or you supervise their activities, you will likely have met this element of a franchise. (Minnesota and Wisconsin have a “community of interest test” in lieu of the significant assistance or supervision test, but at the end of the day, most licensing arrangements that meet the significant assistance test and have the other elements, will also meet the community of interest test.)
When the Minnesota Vikings license their name to someone to make and sell clothing, that is a true license arrangement, because the Vikings do not train or assist that person in selling the clothing, and they do not establish standards for the operation of their business. However, most people that talk to us about licensing arrangements have something very different in mind, and if you let someone use your name, you charge them a fee, and you provide them training and assistance, you have likely sold them a franchise. If you do that, but fail to comply with state and federal franchise disclosure laws, you open yourself to significant liability, both civil and criminal. Moreover, if you later seek to become a franchisor, you will have to disclose these relationships to state regulatory authorities, which will open you to all the risks of having sold an unregistered franchise. The bottom line is that if it quacks like a duck, flies like a duck, and swims like a duck, it is a duck, regardless of what you call it. The same is true for a franchise, and the ramifications of trying to call it something else can be significant.