If you own and operate a successful business and are considering expansion, you may have thought about franchising your business or otherwise licensing your company’s name, processes, and products.

If you decide to go down one of these paths, there are strict federal and state laws that will govern your decision making.

Many smaller businesses consider proceeding with a licensing or “franchise-lite” model in order to avoid the hassle and expense of becoming a franchisor. In a “franchise-lite” model, a licensing agreement is used to allow another party to use a company’s logo and other intellectual property in exchange for a fee. This is done in place of offering an actual franchise, which requires a franchise agreement and a Franchise Disclosure Document (“FDD”).

This can seem like a simple way to avoid unnecessary cost, but if you plan to have any strings attached to the relationship, it’s likely that your “franchise-lite” agreement is actually a non-compliant franchise agreement, exposing you to liability.

Under federal law, a franchise is any commercial relationship in which:

(a) one party licenses its trademark or grants the right to sell goods or services related to its trademark;

(b) the other party commits to making a required payment to the first party; and

(c) the first party either

(i) exercises a significant degree of control over, or

(ii) provides a significant degree of assistance to the other party.

Virginia’s definition is similar.

While a simple licensing agreement does not meet part (c) of the test above, most business owners looking to expand will want to either control some aspect of the new business’s operations for the sake of uniformity and quality control, or provide some degree of assistance. Either one creates a franchise.

While the definition above describes a “significant” degree of control or assistance, the bar is actually somewhat low. Activities qualifying as significant control or assistance include approving the location of the business, setting hours of operation, production techniques, or internal policies, or running promotional campaigns in which the new business must participate.

On the other hand, activities not qualifying as significant control or assistance include trademark controls solely designed to protect the owner’s legal rights in the trademark, enforcing health or safety restrictions already required by law, assisting the new business in obtaining financing, and offering promotional campaigns which are optional to the new business.

As a rule of thumb, potential franchisors can’t have their cake and eat it – if you license your business out and don’t want to be treated as a franchisor, you can’t expect to exercise much, if any, control over what the new business does.

Franchises are subject to the Federal Trade Commission (FTC) Franchise Rule as well as state law. The FTC Franchise Rule requires that franchisors provide potential franchisees their FDD, an in-depth document which contains important information about the franchise opportunity, at least fourteen (14) days prior to entering into a binding relationship or making any payment.

In Virginia, franchisors must additionally register their FDD with the State Corporation Commission and receive approval prior to offering franchises for sale.

Unregistered franchisors face the possibility of federal or state penalties, and the risk that their franchisee may sue due to the failure to disclose the information contained in an FDD.

If you're weighing these questions, it's important to consult with an attorney who can help you understand and comply with all applicable laws and regulations. NOVA Business Law Group, LLP has experienced attorneys that can help guide you through the franchising process.

Joseph P. Kirkwood and Malik Conn are members of the Firm’s corporate transactional and franchising practice groups.

To learn more about your options when franchising, contact us at 703-766-8081.