What is an Accidental Franchise?

Failure to follow the formalities required under state law and by the FTC might unintentionally create a franchise agreement.

Unintentional Franchise Agreement

Over half of the states have business opportunities laws requiring a seller of a business to register with the state and disclose certain information to the purchaser prior to the time the purchaser gives anything in exchange. To avoid civil and criminal penalties, sellers should be careful to ensure they comply with the applicable state laws and verify that they are not selling a franchise or some other business opportunity “couched” as a license.

FTC Franchise Rule

Pursuant to the Federal Trade Commission’s Code of Federal Regulations, anyone who offers, sells, or distributes goods, commodities, or services is considered to be in the sale of a franchise if they:

  1. Provide significant assistance to their customer (or client) in that person’s method of operation.
  2. Charge a fee for their services.
  3. Have a trademark, trade name, advertising or other commercial symbol the recipient can use in its business.[1]

Florida Franchise Law.

Over half of the states have adopted similar laws governing the sale of business opportunities. Florida is one of these states. If you want to sell a business or business opportunity in Florida, you must comply with the Florida “business opportunity” law. In Florida, a business opportunity is defined as the sale or lease of any products, equipment, supplies, or services which are sold to a purchaser to enable the purchaser to start a business for which the purchaser is required to pay an initial fee or sum in excess of $500.[2]

Franchise Definition and Liability.

Franchising, which entails the licensing of a trade name and its business practices and intellectual property to a person or group operating within a specific territory (the franchisee), is a form of business opportunity that is highly regulated. In Florida, a franchise means a contract or agreement, either express or implied, where (1) a continuing commercial relationship of definite or indefinite duration is involved, (2) one party is granted the right to offer, sell, and distribute goods or services manufactured, processed, distributed or, in the case of services, organized and directed by another party, (3) the franchisee as an independent business constitutes a component of franchisor’s distribution system, and (4)  the operation of the franchisee’s business franchise is substantially reliant on the franchisors for the basic supply of goods.[3] Whether a franchise exists is a matter of substance over form. Liability under federal and state franchise laws depends on the relationship between the parties and whether the elements of a franchise agreement are met, regardless of the intent of the parties.

Accidental Franchise.

An accidental franchise occurs when a party unintentionally creates a franchise agreement. Put simply, your lack of intent to create a franchise agreement is not a defense to your failure to follow the formalities required under state law and by the Federal Trade Commission. Consulting with an attorney experienced in franchising matters is a good way to mitigate your risk and avoid liability for an accidental franchise.

If you would like to learn more about franchising or are considering creating one, do not hesitate to contact one of our experienced lawyers at EPGD Business Law, with offices in Miami, Fl, Washington, D.C., and West Palm Beach, FL. Call us at (786) 837-6629 or email us to schedule a consultation.

[1] Charles Moddell, The Accidental Franchise, A.B.A. Business Law Section (2004). https://apps.americanbar.org/buslaw/blt/2004-01-02/modell.shtml.

[2] FLA. STAT. §559.801(1)(a).

[3] FLA. STAT. §817.416(b).


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