Could a Franchise Be a Viable Opportunity for a Michigan Entrepreneur? (Part 2) -- What Constitutes a Franchise?
This post is the second in a series of posts in which I discuss the basics of federal and Michigan franchise law for entrepreneurs. My goal is to provide a basic overview so that those Michigan entrepreneurs who are considering purchasing a franchise will have a beginning resource to help guide them in their deliberations. In my first post, I discussed the two types of franchises that can exist: a package franchise or a product franchise. In this post, I discuss the three characteristics that must be present in a relationship for either a package or product franchise to exist.
Under federal law, three characteristics must be present in a relationship for either a package or product franchise to exist:
1. Distribution of goods or services associated with the franchisor’s trademark;
2. Exercise of significant control, or the giving of significant assistance to, the franchisee by the franchisor; and
3. Payment by the franchisee to the franchisor of at least $500.00 before the expiration of the first six months of operation of the franchise business.
Unfortunately, little uniformity exists among states as to the precise definition of a franchise. Most states, however, use what is generally referred to as a “marking plan or system” definition or a “community of interest” definition. Both definitions encompass some similar elements. Michigan has adopted a “marketing plan or system” definition.
The exact definition of a franchise in Michigan is as follows: “Franchise” means a contract or agreement, either express or implied, whether oral or written, between 2 or more persons to which all of the following apply:
(A) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor.
(B) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate.
(C) The franchisee is required to pay, directly or indirectly, a franchise fee.
In my next post on this topic, I will discuss the obligations a franchisor has in this unique business relationship.
