If you have a coaching group or you are considering having one this question has very likely crossed your mind. It certainly has for our clients.
The answer of course is that it depends. The good news is that you can, with reasonable care, keep your area exclusive operations away from the classification of a franchise if that is what you want to do. We say "if you want to," because there will be times when a franchise may be the very thing that you do want to structure. If you decide to incorporate franchise elements into your business then naturally you will then want to make sure you comply with the franchise laws. The reason you may want to look at structuring your program as a franchise is because you will open the door for larger revenue streams.
To gain insight into the proper legal structure for your growing business we want to start at the beginning.
What is a franchise?
There are three elements that make up a franchise. If you have the three elements present you have a franchise whether you call it that or not. To be clear, calling your business system an area exclusive, coaching group, license, or distributor won't help you a bit if you have all three of the required elements that qualify you as a franchise. You will be a franchise. If you haven't prepared for that, then such classification could be a disaster.
The law is clear and the courts will rule you have a franchise if you have these three elements:
1. You grant or license the use of a trademark or trade name
2. There is a payment of a fee
3. There is the existence of a community of interest between the parties such as a marketing plan, control, assistance or area exclusivity.
If you can eliminate one of the three "legs" of the franchise "stool", you do not have a franchise. But make sure you do a good job of kicking the leg out.
In most cases you will want a payment of a fee so this leg stays in. Sometimes people try to hide it in the form of some "other type of payment," like training fees, but the courts have been pretty adapt at finding that payments are payments no matter what you try and label them. Name classification does not change the reality. A continuity fee, royalty, or residual income would all be considered a fee payment.
In many of the coaching businesses or area exclusives there is an element of community of interest for sure. The "Done 4 You Services" that are often accredited to build value of the sale fall into this class. If you promise to help build your clients' business using your marketing system you have crossed the line and have community of interest.
The exclusion of granting the use of trademark or trade name is usually where you can avoid the franchise tag if you so desire. But what if you have loosely tied an Association to your group or operations system that your group uses to market with. Does that put you back into the franchise mix? To us, the answer would be yes and the "rule of common sense law" governs. If it looks like a duck and quacks like a duck, it is a duck no matter what you call it. It won't matter that you haven't formally filed a trademark application, you may very well be deemed to have a common law trademark. It is ironic that what you might have wished to be able to prove, that someone was trying to steal your material, actually comes back to bite you with a regulator or opposing attorney making the same argument.
So do you want to be classified as a Franchise?
An important question you may want to ask yourself is whether you really want to avoid the franchise tag, even if you can. One reason is that a franchise can bring legitimacy to your operation that other methodologies, such as area exclusive licenses, simply can't. Franchises are now recognized as a respected form of operation and a buyer may feel more comfortable with the franchise label and even feel he is getting more value from your system if it is a franchise.
Some people want to avoid the franchise tag because the cost of documenting the franchise structure is more expensive. This is true in the beginning of the business but remember what you are doing is creating a disclosure document which tells the prospective buyer of all the potential risks of your business. Having the disclosure document in place is precisely one of the things that will protect you if something goes wrong. Not having a disclosure document will bring a law suit down to a "he said she said" issue on what you did or did not tell the buyer and in almost all consumer cases, the seller loses without the correct documented disclosures.
Creating your own "franchise network" may also give you more value if you ever decide to exit your business. Trying to sell a coaching group is a lot harder than try to sell a franchise network. In fact, franchise networks also go public and sell for "multiples" of the income stream. What are commonly referred to as "earnings multiple" sales prices are not yet commonplace, in the more recently devised National coaching or "Area Exclusive" business structures.
The Business Opportunity Dilemma
Sometime in the next 12 months, we expect the FTC will pass a totally new Business Opportunity Rule that will address business systems like we have been discussing that are not franchises. When they do, we also expect that they will come to require some sort of disclosure document for business opportunities like those of franchises. If this occurs, and it seems certain that it will, your business system will be one or the other: franchise or business opportunity and you will have to comply with the rule of that business label. From a marketing position alone you may prefer to be a franchise because business opportunities have always had a sort of tainted reputation and it will take some years to change the image.
Notes: Federal Trade Commissions Rule (16 CFR Sec 436)
Business Opportunity Rule (16 CFR Sec 437).