July 1, 2008

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Ernst &Young 2008 Entrepreneur of the Year

Based on what they’ve seen from this year’s Entrepreneur of the Year entries,...Read More

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Your (Brand) Name in Lights

Unraveling the Legal Implications of Becoming a Franchisor

Gretta Spendlove

July 1, 2008

Howard-Johnson. Jenny Craig. Carl’s Jr. Mida. All are brand names that have become household words. The very strength and familiarity of the brand name alone makes large profits for the companies that franchise the brand and its products. Utah companies are also jumping on the franchise bandwagon. For instance, Tunex sells car care franchises and Rumbi’s Island Grill sells restaurant franchises. Both are headquartered in the Salt Lake City area. How do companies make money by authorizing others to use their names and sell their products? Imagine GreenPro, a mythical garden care company that provides landscaping advice to home and business owners. If they want to start a franchise, they’ll need to start at the Utah State Office of Consumer Protection and the U.S. Federal Trade Commission (FTC), the agency that determines which businesses can franchise. What Laws Apply Franchises are heavily regulated by both the FTC and state law. If GreenPro falls within the definition of “franchise” for purposes of those statutes, it will need to provide a disclosure statement to potential investors, complete filings with state agencies and meet strict requirements regarding refunds, earnings claims and other matters. The FTC uses a three-part test to determine which businesses must comply with the franchise rules. First, the franchisor (seller of the franchise) offers the franchisee (buyer of the franchise) the right to distribute goods or services that bear the franchisor’s trademark, trade name or other commercial symbols. Second, the franchisor exercises significant control over, or offers significant assistance in, the franchisee’s method of operation. Finally, the franchisee pays the franchisor at least $500 for obtaining the franchise. There are some exceptions to the definition, such as employer-employee and general partnership arrangements and single trademark licenses. Let’s imagine GreenPro has a catchy name and logo that it plans to offer to its franchisees. To protect the value of its name and product, GreenPro will require franchisees to contribute to and participate in a common advertising campaign, and to provide landscaping and lawn care services according to a certain procedure and schedule. GreenPro plans to charge $10,000 to each franchisee and its managers will occasionally inspect franchisees’ business operations. By comparing GreenPro’s business plan to the FTC description, it’s apparent that the FTC would define GreenPro’s plans as a franchise. If GreenPro licensed its trademark, but didn’t specify how the licensee’s must run the business, such as letting the business sell products or services other than GreenPro’s, in any manner or combination the licensee chose, the relationship wouldn’t likely be defined as a franchise. Sales of business ideas which don’t include all aspects of a franchise may still be regulated by the FTC and state law as “business opportunities.” Some businesses structure their relationships to avoid the franchise laws, in which case they may have to comply with the business opportunities laws instead. Other businesses do just the opposite, seeking the protections franchise laws give franchisors if they fully comply. Obtaining Clear Rights in IP Two of the most valuable assets franchisors offer their franchisees are the company name and logo. If the right to use the name or logo is lost or challenged, the franchisees will be damaged and angry, and will probably sue. Thus, it is vital for the franchisor to hold strong trademarks on its name and logo, as well as any other patents, copyrights and trademarks necessary to protect the equipment, products or advertising which it provides for its franchisees. For hard-to-protect items such as recipes, the best protection may be to keep the item very private as a trade secret. If our imaginary company, GreenPro, did a search of the U.S. Trademark Office database and discovered that another company is using the name “GreenPro” for a chemical fertilizer, GreenPro may be able to convince the trademark office that chemical fertilizers are not so similar to landscape and gardening services as to create a “likelihood of confusion,” and therefore, obtain its trademark. If GreenPro can’t do that, it’s time to find another name. Getting Specialized Help Strong, popular products and good management form the basis for robust franchises. However, even with those essentials in place, putting together a franchise is complicated. The disclosure documents for franchisees are voluminous and detailed, the contracts are complex and the legal fees for putting together those documents and making the state filings can cost $20,000 or more, even before negotiations with the first franchisee. Companies who want to franchise their products need skilled and experienced attorneys and advisors guiding them through the process. Names in Lights McDonalds, Holiday Inn and Haagen-Dazs are strong brands that have made fortunes for their owners. Franchising can be one way to turn a strong brand into big money. It does, however, require business skill, good legal advice and a bit of luck.
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