Franchise Operations

Accidental Franchises?

Erasing Oops !Any franchise you find listed here at America’s Best Franchises — and don’t miss the New Franchises page to see the latest listings — is a franchise opportunity available for investment. But there is something you might not have heard of before: an accidental franchise.

The American Bar Association lists a number of cases in which people have been surprised to be identified as franchises, pointing out that there are just three things required for a company to be a franchise under the law:

  1. One company allows a business operator to use its trademark
  2. The trademark owner provides assistance and guidance
  3. The operator pays a fee to the trademark owner for the relationship

Sounds like a franchise, right? And yet these characteristics could apply to a range of situations that we don’t usually think of as a franchise. For example, in 2011, a Girl Scout council took an issue with the Girl Scouts of America to court under a state franchise law. The court concluded that “[f]rom a commercial standpoint the Girl Scouts are not readily distinguishable from Dunkin’ Donuts.”

Yet few of us would agree that the Girl Scouts are a franchise, and you definitely can’t get in on the Girl Scout cookie action by buying a location.

Other circumstances that could create an accidental franchise:

  • A mobile service company lets top employees sell and provide its services to people, operating as a satellite of the main company and paying part of the income to the company.
  • A professional consortium charges dues and group marketing fees, provides training and certification, and allows the use of a centrally-developed logo or badge.
  • An artisanal spa products company enlists salons as distributers of its products, allows the salons to use their logo in marketing, and provides training in using and marketing the products as part of an initial buy-in requirement.

All three of the characteristic franchise elements must be included for an organization to count as a franchise. For example, if you are allowed to display the logo of a professional organization and you pay dues, but the organization doesn’t provide assistance or instruction, it’s not a franchise. Or if a group of store owners in a shopping center work together to promote the trademark of the shopping center, but pay nothing to the trademark owner for the privilege of doing so, that is also not a franchise. Equally, if you sell products for a manufacturer and are paid for doing so, but do not display their trademark, it’s not a franchise.

Why does it matter? Franchises are subject to regulations which are different from the rules for other businesses. If you invest in a franchise business opportunity, you have certain protections and responsibilities, which may vary from state to state. If you’re in an “accidental franchise” arrangement, you don’t necessarily have those protections, or those responsibilities. It will depend on court rulings.

If you have been considering a casual arrangement like the ones described, you may or may not be investing in a franchise business opportunity. If so, you might be doing so without the benefit of a Franchise Disclosure Document. Think twice.

Pending Request