What is a Franchise?

When we say, "franchise," we think of the traditional franchise empires like McDonald's and Starbucks. Lately, there has been a surge of new and eclectic trendsetting franchise businesses entering the franchise arena, including frozen yogurt shops with a contemporary flair and self-help stations, gourmet tea shops, and seasoned fried chicken restaurants. Franchising is no longer a business structure that is reserved for "large franchises" that have a long operating history and business track record. It actually has become a popular business structure that business owners can elect to set up even in the earliest stages of their respective businesses. What is necessary is the right product and business concept, and the financial means to support its franchise program, in order to propagate the business quickly in a growing market or industry.

A franchise is:

  • an agreement, either express or implied and either written or oral, between two parties, where the franchisee is given the right to sell or distribute goods or services under a marketing plan or system prescribed in substantial part by a franchisor;
  • the operation of a business substantially associated with the franchisor's trademark or commercial logo; and
  • a situation where the franchisee is required to pay, directly or indirectly, a fee of $500 or more.

Not all states require the franchise to be registered before it is sold in that state. There are fourteen registration states, including California. Each of these states has its own set of franchise regulations and laws that govern the sale and operation of franchise businesses. In an effort to streamline the franchise disclosure requirements, the Federal Trade Commission has revised the disclosure format for all franchise programs as of July 1, 2008.

To register a franchise, you need to file the following main documents, among others:

  • Franchise Application with the relevant state filing fees;
  • Franchise Disclosure Document together with all its exhibits;
  • Exhibits will include, among others, audited financial statements, franchise agreement, table of contents of the operations manual, and other general information and references.

The average time that it takes to register a franchise can be anywhere between six months to over a year.

To ensure proper and timely registration of your franchise and to find out how best to structure your franchise business, consult with a franchise attorney in your local area. Min K. Chai is a finance commissioner for the City of Irvine, and is available to discuss your franchise questions and issues.

Min K. Chai is an Associate with Kring & Chung, LLP's Irvine, CA office. She can be contacted at (949) 261-7700 or mchai@kringandchung.com.