Are you selling franchises or partnerships?

by | Mar 29, 2019 | Blog, For Franchisors

Part 1 of 2

You are a successful restaurateur, managing and running multiple eateries in multiple locations for several years. You started with a single location. It opened and was a hit. So you opened a second restaurant in a different location which turned out to be just as popular. You decide to protect your restaurant’s name by registering it, your trademark, with the United States Patent and Trademark Office.

A few years later, a friend of yours notices your success and asks if he can become an investor and help you open a third location. You realize that with your operations know-how and his capital and manpower, there is no reason not to open a third…So, you do.
You form a partnership, and under that umbrella, you open a restaurant using your trademark name. Your friend invests money to acquire the location, lease the equipment and buy inventory. You contribute your know-how and teach your friend everything he must know to manage this new operation. In exchange, you both agree to split the profits 50/50.  All goes well and before you know it, your third location is up and running — another success.

Is your partnership a franchise?

Maybe. But keep reading, because fast forward a couple of years further and now even your customers have begun to take notice of your restaurant brand’s success. Some express interest in your concept. They ask if they might join (or “partner”) with you to open more restaurants. Perhaps they know of a great location that just became available, or they think your restaurant could succeed in their hometown.

You like the idea of expanding with additional partners, but wonder that as you plan to retain a part ownership in each new restaurant, whether your “partnership” has transitioned into a franchise? Good question.

Why did my lawyer have me set up a partnership instead of a franchise?

Franchising law is complicated, which means the answer to this question also is complicated. You, and perhaps your attorney, may have unknowingly set up an illegal structure by setting up a partnership rather than a franchise.

Be informed. In many states, and New York is one of them, you must register your franchise offering before you can sell a franchise yet as soon as someone pays you a fee to use your trademark and system of operation, you’ve created a franchise relationship. It doesn’t matter whether you, as the owner of the brand, retain an ownership stake in each restaurant. Indeed, it doesn’t matter what you call your relationship. If it walks like a duck and quacks like a duck, it’s still a duck. So, when your friend invested in your concept and you opened that third restaurant together, you may well have just sold your first franchise.  And ignorance of the law is no excuse.

You’ve got to pay attention. If you think that you may have unwittingly sold a franchise because you thought you were setting up a simple partnership, STOP. If you’ve been having conversations with prospective “partners/franchisees” that might lead to what ultimately will be considered the sale of an accidental franchise, STOP, and consult a knowledgeable franchise attorney. Check back here next week, when we’ll cover potential remedies.

Bottom line: Whether you are thinking of buying/selling a franchise or another privately-held business or practice, you must pay attention to the details. Most issues can be addressed fairly early in the franchise/business selling/buying process, but only if you know those exposures exist. That’s why it makes sense for buyers and sellers to engage experienced franchise counsel to guide them through the franchise acquisition/disposition process. Got questions? Feel free to email them to me, Julie Lusthaus at [email protected]  and let’s talk.


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