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By Stephen S. Raines - I am often asked, "Why do I have to go to the trouble of creating a franchise program? Why can't I just call my system a license or distributorship and bypass the legal documentation required for franchising?" The answer to this question lies in how the courts and regulatory agencies view the legal definition of a franchise.

According to federal laws, a franchise has three elements. The first is the use of a common trade name or trademark. The second is the payment of a fee, whether an up-front fee, on-going payments or simply the sale of products for profit. The third factor is the rendering of "substantial" assistance. This assistance can take the form of training, an operating system, marketing, purchasing, on-going advice, a proprietary computer program or other forms of support. Helping the "licensee" create a detailed marketing plan has been deemed to be substantial assistance. If the business relationship has these three elements, it is a franchise.

Over time, a large body of case law has been developed relating to the question "What is a franchise?". The courts have reasoned that setting up a franchise program is not difficult. While developing a franchise program takes money, time and a certain amount of expertise, it is hardly a unique process. Thousands of companies in the U.S. have successfully franchised their businesses. Therefore, the courts have a tendency to find anything which has these three elements a franchise – regardless of what the company calls the program, be it a license, partnership, association, distributorship, co-operative, joint venture or limited partnership.

Business relationships may be subject to scrutiny by governmental agencies in addition to the courts. On a federal level, the Federal Trade Commission has jurisdiction. Some states have laws governing franchise relationships; an Attorney General may sue a company that is selling "franchises" but calling it by another name.

Federal and state laws require full disclosure of the terms of the arrangements to the prospective franchisee. A precise format has been created for this disclosure, called the Uniform Franchise Offering Circular (UFOC). Regulations also exist governing the process of selling a franchise.

The courts have further reasoned that telling a prospective Franchisee about the terms of the contract, the company and its principals is a positive step. A properly drafted UFOC creates a better-informed business owner. For this reason, the courts and governmental regulatory agencies have strictly enforced the requirements for full disclosure in the franchise sales process. Over the years, they have broadened the definition of a franchise in order to encourage complete disclosure.

If a company is in fact offering a franchise, it must create a properly structured franchise program. If not, the company could be subject to large fines, judgments for damages, injunctions, or, in certain circumstances, criminal penalties.

If it looks like, sounds like, feels like, smells like and tastes like a franchise, it will be considered a franchise. It is best to recognize this fact from the outset. Creating a franchise program from the beginning is not difficult and can be highly profitable.

Stephen S. Raines, a nationally recognized expert on franchising, is President of National Franchise Associates. NFA is an Atlanta-based, full-service franchise development and consulting firm. Mr. Raines has over 30 years experience in franchising. NFA's telephone number is (770) 945-0660

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