What exactly is a franchise?

Kalia Law P.C. has been getting a lot of questions about franchises recently, so we figured a summary might be useful.  A franchise is a business arrangement where the owner, or franchisor, sells the some of the business rights – often including the name, logo and business model – to another party, or franchisee.

Buying a franchise is attractive to many entrepreneurs because they see it as a less risky proposition than starting a new venture, because the business they are buying into has a recognizable brand and proven track record.  For franchisors, the arrangement offers a way to expand the reach of the business and increase its income.

Prospective franchisors and franchisees should know that franchises are regulated by the Federal Trade Commission, which requires franchisors to give prospective franchisees a detailed disclosure document including information about the company and the franchise arrangement.  In addition, many states, including California, require franchisors to file the disclosure document with the state.  Because of these requirements, it can become expensive and tricky to set up a franchise.

Some prospective franchisors attempt to get around the franchise requirements by calling the arrangement something different, such as a license arrangement.  This is a bad idea and can get you into trouble.  If the business arrangement includes the selling of some rights, an upfront fee, and ongoing control from the business owner, it’s probably a franchise, and you’d better make sure all the disclosure requirements are met.

- Claire Kalia

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