Beware of ‘Alternatives to Franchises’: They May Still Be Franchises Under the Law
An ad for an ‘alternative to franchising’ recently caught my attention. I specialise in all kinds of ways of scaling businesses, so I was interested in what the advertiser had to offer, and read on. This ad promised an alternative business model to franchising without the legal entanglements.
Uh-oh.
There are no laws specifically covering franchising in New Zealand, where I am based, but because I also work with franchisors in countries where franchising is regulated, I am fully aware of the dangers of misclassifying a business model as an ‘alternative to franchising’ when in fact it would be defined as a franchise under the law.
Franchise laws are designed to protect franchisees from unfair practices and ensure transparency. They typically require franchisors to provide a Franchise Disclosure Document (FDD), adhere to specific advertising rules and follow other regulatory guidelines. Business models that resemble franchising but are misclassified as something else leave ‘franchisees’ unprotected and unsuspecting or unscrupulous ‘franchisors’ vulnerable to severe legal consequences.
The Franchise Trap
Business owners are drawn to expansion models marketed as franchise alternatives, such as:
- Licence agreements
- Distribution agreements
- Dealerships
While these models may seem distinct from franchising, the legal definition of a franchise is broader than many realise. In most jurisdictions, including Australia and the United States, a business relationship is considered a franchise if it meets three key criteria:
- The right to use the franchisor's trademark
- Significant operational control or assistance from the franchisor
- Payment of a fee to the franchisor
If your business model meets these criteria, it may be classified as a franchise regardless of what you call it.
Consequences of Misclassification
Failing to comply with franchise laws can result in severe penalties, including:
- Fines and monetary damages
- Cancellation of agreements
- Criminal charges in some cases
Protecting your business
To protect your business from the risks of franchise misclassification:
- Consult with me or a franchise lawyer before implementing any expansion model
- Carefully review your business structure against franchise laws in your jurisdiction
- If your model meets the definition of a franchise, embrace it and comply with all relevant regulations
Remember, attempting to circumvent franchise laws rarely ends well. It's far better to structure your business properly from the start than to face costly legal battles down the road. By understanding and respecting franchise laws, you can build a strong, compliant expansion model that sets your business up for long-term success.
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