Beware: If you own more than one restaurant which operates under the same name, you may have created an illegal and unintended franchise.
This sounds crazy, but it is actually very common and the consequences of creating an unintended franchise are substantial, serious, and include the possibility of both personal and criminal liability. Many well-intentioned operators have tried to avoid the franchise tag by referring to their business relationships and partnerships as a “license,” or a “capital investment,” but the label placed on a relationship has little bearing on whether or not the relationship constitutes a franchise.
Would the same operators have pursued a different path if they had known that their mistake could result in the rescission of every one of their business transactions and the filing of criminal charges against them? It is a felony to sell a franchise without complying with both State and Federal law, and the respective agencies have the power to shut down your restaurants, freeze your bank accounts, order restitution, prevent an operator from opening new locations, impose huge penalties, award attorney’ fees to all injured parties, and rescind every one of the offender’s agreements under claim of fraud. And, to top it off, claiming that they relied on the advice of their attorney will not help since franchise statutes impose strict liability, meaning that an owner’s intent or knowledge of the law (or lack thereof) is irrelevant.
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