Andrew Flusche, Fredericksburg Lawyer

It seems like franchises are everywhere these days. Businesses are increasingly turning to this form of expansion, and individuals are taking them up on it. But before you sign anything, you need to know what you’re signing. You may not be setting up a McDonald’s, but even a home-based business can trigger special federal and state requirements.

The best way to protect yourself is to have a business attorney review your proposed deal before you sign anything. I am available to help with that. But you can also educate yourself about the different types of businesses.

Franchise

I like to think of a franchise as the most-regulated and most-formal type of business arrangement. Franchises have fairly strict requirements to fulfill.

Virginia Code 13.1-559 defines “franchise”:

“Franchise” means a written contract or agreement between two or more persons, by which:

1. A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services at retail under a marketing plan or system prescribed in substantial part by a franchisor;

2. The operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and

3. The franchisee is required to pay, directly or indirectly, a franchise fee of $500 or more.

Of course there are exclusions to this definition. A business arrangement might fit the definition of a “franchise,” but the Virginia Code excludes it from the franchise requirements because it doesn’t require a physical place of business (such as a retail storefront).

Business opportunity

The Virginia Business Opportunity Sales Act provides the definition of “business opportunity”:

For purposes of this chapter, “business opportunity” means the sale of any products, equipment, supplies or services which are sold to a purchaser upon payment of an initial required consideration exceeding $500 for the purpose of enabling such purchaser to start a business, and in which the seller:

1. Represents that the seller will provide locations or assist the purchaser in finding locations for the use or operation of vending machines, racks, display cases or other similar devices, or currency-operated amusement machines or devices, on premises neither owned nor leased by the purchaser or seller; or

2. Represents that it will purchase any or all products made, produced, fabricated, grown, bred or modified by the purchaser using in whole or in part the supplies, services or chattels sold by the seller to the purchaser; or

3. Guarantees that the purchaser will derive income from the business opportunity which exceeds the price paid for the business opportunity, or that the seller will refund all or part of the price paid for the business opportunity, or repurchase any of the products, equipment, supplies or chattels supplied by the seller, if the purchaser is not satisfied with the business opportunity; or

4. Represents that the seller will provide a sales program or marketing program which will enable the purchaser to derive income from the business opportunity which exceeds the price paid for the business opportunity.

Basically, this means that if you pay over $500 for a business deal and the seller guarantees or represents that you’ll make a profit from it, that he will purchase the items you make, or that he will find locations to place your business devices, it is a “business opportunity.”

But as with a franchise, there are exclusions to this definition. They are provided in Virginia Code 59.1-263.

Other business opportunities

Even if a deal doesn’t fit within the Business Opportunity Sales Act, you still might have some protections provided by the Commonwealth of Virginia. The Virginia Consumer Protection Act of 1977 also covers business opportunities:

“Business opportunity” means the sale of any products, equipment, supplies or services which are sold to an individual for the purpose of enabling such individual to start a business to be operated out of his residence, but does not include a business opportunity which is subject to the Business Opportunity Sales Act, Chapter 21 (§ 59.1-262 et seq.) of this title.

The requirements under the Consumer Protection Act are much lighter. There is a litany of prohibited practices, but they mainly center on being truthful as to any goods or services you sell.

As you can see, even determining the type of business deal you are doing can be difficult. And we haven’t even looked at the specific requirements for each arrangement. More on that to come.

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