Law Offices of

What is a Franchise?


   Doesn’t everyone know what makes something a franchise?  Isn’t it the fast-food restaurant down on the corner?  Certainly, many fast-food restaurants are franchises,  but that doesn’t mean that every franchised business is a fast-food restaurant.  In fact, the most-common franchises are probably things you don’t even think of as franchises---gas stations and car dealerships.  Other franchised businesses include hotels, real estate offices, plumbers, carpet cleaners, hardware stores, day spas, and coffee shops.  In fact, many different kinds of businesses have been successfully franchised, and there are few industries that do not have at least one franchised company involved. 

    Working definition.

    A good “working” definition of a franchise is that it is an independently-owned business that gives the appearance to customers of being part of a larger chain.  That’s not a precise definition, and it has flaws at both ends (it includes some businesses that are not franchises and it leaves out some businesses that are franchises), but it’s still a good place to start to understand what makes something a franchise. 

   Legal framework. 

   More formally, both the federal government (through the FTC) and over half of the states have laws that regulate franchising in one way or another (either before a franchise is sold, during its operations, or both).  The exact language used to define a “franchise” varies from state-to-state, but the most-common definition of a franchise requires three things: (a) use of a trademark or other commercial symbol owned by the franchisor; (b) payment of a fee of some type; and (c) some type of training, assistance, or other controls that causes multiple locations owned by different people (the franchisees) to look like they are all owned by the same company.  That’s a pretty “quick and dirty” explanation, but (as with so many things) the devil is in the details.  There are many cases that deal with “hidden” franchises or “inadvertent” franchises--situations in which neither party thought that the arrangement they were entering was a franchise, until problems developed in the relationship.  Please call me if you have questions about a particular set of facts and whether a particular business is a “franchise.” 

    What about a “License”?  What’s the difference? 

   The short answer is that there often isn’t a great deal of difference.  Many people have a fear of franchising, and so they set up a business model that they claim is a “license” instead of a franchise.  Refusing to call a business a franchise doesn’t make much difference, however, if the requirements of a franchise are satisfied.  On the other hand, many laws will treat a business as a “franchise” if the parties call it that (even if the business does not actually satisfy all of the legal elements of a franchise).  But no state will allow the parties to avoid the franchise laws merely by avoiding the “f-word” (that’s “franchise” if you’re wondering). 

    How common is franchising? 

   There have been two different studies in the last few years about the prevalence of franchising in the economy.  The International Franchise Association (the nation’s largest association devoted to franchising) commissioned a study in 2005, and the U.S. Census Bureau did a similar study in 2007.  The IFA study found that franchised businesses accounted for more than 10% of all private-sector economic activity, and over 15% of all private-sector jobs.  The Census Bureau found that of the businesses in this country that have employees, over 10% are franchised, in almost 300 industries.  By any measure, that’s a major portion of the U.S. economy.