Franchising (among others, subject to FTC and state regulation)
Franchising is regulated both by federal and state government agencies. Therefore, a great deal of formalities must be observed and complied with in order to implement such a business model. Under the rules, a great deal of disclosures must be made to the potential franchisee. Failure to observe these regulations can lead to very serious monetary penalties and business problems in the future. When the required amount of care and diligence is shown, franchising may be an excellent way to increase the revenue and value of a business. Some businesses can drastically increase their revenue by changing their business model to offer franchising. If a business has a successful business model and a good brand, other businesses may see good value in paying for the rights to adopt that business model and brand as their own. The franchisor can continue to stay in the same line of business while charging others for the chance to use its own intellectual property. Not only does this provide for multiple other sources of revenue, but also allows the brand to grow in fame and value much quicker than it would without franchising
A relevant area of concern is that parties commonly enter into a business relationship without even being aware that their relationship is actually franchise, subject to all the relevant regulations – the “accidental franchise.” Actually, it takes very little to fall into this unplanned situation. This can make the accidental-franchisor the target of government investigation. At times, the accidental franchisee can use the lack of compliance to void the entire relationship and its own liability to the other party. Accidental franchising can be avoided in advance with careful planning and can be remedied with strategic diligence.