It’s 2016, your business is booming, and you want to expand. Maybe you own a restaurant, a fitness studio, a coffee house, or perhaps a retail store. Go-big-or-go-home is your motto. And now you’re ready to franchise your existing business or purchase a franchise. It’s time to dig deeper into the logistics of making that dream a reality. Maybe after some Googling you come across the “Franchise Rule,” passed by the FTC (Federal Trade Commission), but you’re not totally sure that it encompasses. Here’s a quick review of the Franchise Rule:

1. Who does the Franchise Rule apply to?

The Franchise Rule applies to franchises, franchisors, franchise sellers and prospective franchisees. Great, but what does the FTC consider a franchise? Glad you asked.

2. A Franchise according to the FTC.

A Franchise is a business arrangement between a buyer and seller with the following three characteristics:

  • Buyer’s right to use the seller’s trademark. (For example, the Subway trade name/logo.)
  • The commitment of the seller to either 1) retain significant control over operation of the business (Like the Subway sandwich making techniques that are uniform at all Subway shops.), or 2) to provide significant assistance to the buyer’s business operations.
  • Buyer’s payment of at least $540 to the seller either before or during the first six months of the operation of the business.

**Keep reading below for the definition of a Franchisor, Franchise Seller, andFranchisee.

3. How does the FTC define a Franchisor?

A Franchisor is any person (which includes any individual, group, association, limited or general partnership, corporation, or any other entity) who is involved in both:

  • Pre-sale franchise activities, such as the offer, sale or arrangement for sale of a franchise.
  • Post-sale franchise activities, through some level of participation in the franchised business.

4. How does the FTC define a Franchise Seller?

  • The Franchise Seller includes the franchisor, its employees, agents, representatives, sub-franchisors and third party brokers involved in franchise sales activities.
  • The definition excludes existing franchisees selling only their own outlet or who are otherwise not engaged in franchise sales for the franchisor.

5. What is a Prospective Franchisee?

  • A Prospective Franchisee is someone a franchise seller approaches or someone who approaches a franchise seller to discuss the possible creation of a franchise relationship.
  • Prospective Franchisee does NOT include: members of the public or those generally interested in or curious about the franchise business, such as journalists or academics.

Check out this article from the International Franchise Association about the advantages and disadvantages of owning a franchise.

We can help your business navigate the legal complexities of franchising.

**Also, stay tuned for a post on Franchise Disclosure Documents.