Your Business Matters AlexanderAbramson.com • (407) 649-7777 Novembe 2018
FRANCHISE VS. LICENSE WHY THE DIFFERENCE MATTERS TO YOU AND YOUR BUSINESS
THE FTC’S DEFINITION OF ‘FRANCHISE’
We recently talked with a business owner who was looking to expand his successful service business. He told me that he wanted to franchise his business, but he didn’t want to call it a “franchise.” He wanted to sell the right to use his business’s name and systems and collect ongoing royalties, but he didn’t want to go through the hassle or cost of preparing the franchise disclosure documents. I told this particular owner the same thing I’ve told many owners before: “You can call a duck an eagle, but that doesn’t make it true.” In other words, the name you choose to use doesn’t define a business arrangement. Rather, the arrangement determines which name is correct. Franchise and license aren’t synonyms, and the distinctions are crucial. If your company creates a franchise but doesn’t provide the required disclosures, you could be personally liable for the buyer’s damages.
common symbol could even exist where the phrase “Part of the Acme Business Group” is used in marketing materials. Generally, if a name or logo is a part of the arrangement, the trademark element will be satisfied.
The Federal Trade Commission regulates franchise disclosures through the Franchise Rule (“The Rule”). The Rule defines a “franchise” as a business arrangement that has the following broadly-interpreted elements:
PAYMENT OF $500 OR MORE IN THE FIRST SIX MONTHS
A common trademark or commercial symbol
Payment of $500 or more during the first six months of the relationship
A franchise fee of $500 or more is sufficient, but, because the elements are interpreted broadly, all of the following payments count toward the $500 threshold:
Significant control or significant assistance
Inventory and equipment
USING A COMMON TRADEMARK OR SYMBOL
Marketing and sales materials
This element includes registered trademarks, like names (e.g., McDonald’s or Nike) and logos (e.g., the Arches or the Swoosh), as well as trade names, service marks, and other symbols that indicate a common origin or enterprise. A
Training and training materials
Rent (equipment and real property)
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