Partner Andrew Sherman Reveals When a Business Crosses the Franchise Line on ‘Start With a Win’ Podcast

Partner Andrew J. Sherman was a guest on the “Start With a Win” podcast and discussed how a business can know when it is running a franchise.

During the May 3 episode, hosted by recently retired RE/MAX Holdings CEO Adam Contos, Sherman said when a business crosses the line into a franchise, sometimes it’s inadvertent, which can cause regulatory complications. What’s important is to make sure to know what a franchise is and what, under federal and state laws, qualifies a business as a franchise.

Sherman said no matter what a business calls itself, if the federal and state regulators find three elements of the transaction present, then that means the business needs to comply with the franchising laws.

“Think of them as three legs of a stool,” he said, explaining that the first leg is the licensing of the brand, and the identity of the business is going to be licensed from the franchisor to the franchisee.

The second one, he continued, is the initial payment of $500 or more within the first six months of the relationship, and the fee element could be satisfied if there’s an embedded relationship, an irregular markup on equipment or inventory that the franchisee has to buy.

“The third one is the most elusive, because it has to do with a subjective test of significant control or assistance,” Sherman explained. “If the franchisor or the licensor is exercising quality control over the franchisee’s day-to-day operations and there’s training programs and operations manuals.”

Sherman also discussed employee engagement and what leaders of franchisors need to include in their strategic planning meetings to be successful.

Sherman is chair of the Firm’s Franchising practice and co-practice group leader of the Emerging Growth Companies & Venture Capital group and a recognized authority on the legal and strategic aspects of business growth. He is the author of 26 books on business growth, entrepreneurship and M&A and teaches courses on entrepreneurship at the Robert H. Smith School of Business at the University of Maryland and at the Georgetown University Law Center.