These are my Google search results from Dec. 14, 2016 when I searched for: “Virtual Franchise” Scam
In the context relevant to this article, a “franchisor” is someone who grants a commercial franchise. A “commercial franchise” is “a franchise using local capital and management by contracting with third parties to operate a facility identified as offering a particular brand of goods or services.” Id. A “franchisee” is the person or entity to whom a commercial franchise is granted.
Words matter, because when one changes the words he uses, he conveys different meanings, ideas, and impressions to whoever hears or reads his words. Fraud necessarily entails materially misleading the victim of the fraud; the chief way in which that is done is by intentionally or negligently using materially misleading words when discussing what a business does or the way in which it operates. When one refers to a business as a “franchise”, even a “virtual franchise”, when it is not a franchise, such a reference is materially misleading.
The most important difference between a franchisor-franchisee relationship and a Principal-Agent relationship is that, in the case of the former, the franchisee is an autonomous business that directly provides goods and services to consumers, whereas, in the case of the latter, an “independent contractor” serving as an agent merely offers goods and services on behalf of the principal. In effect, the “independent contractor” / agent is nothing more than a salesperson working on behalf of the principal. On the other hand, a franchisee is an autonomous business that licenses intellectual property from, uses a business model prescribed by, and may obtain some goods and services from the franchisor.
If, for example, a franchisee organized as a limited liability company (“LLC”) opened up a fast food restaurant as a Wendy’s® or Burger King® in a building owned by the franchisee, in theory, that same LLC could end its agreement to be a franchisee and continue operating a fast food restaurant out of the same building.
The branding (and supply of branded materials or brand-specific goods) is part of–actually, the essence of–the franchise relationship, but the actual business–the people involved and the type of goods or services provided–is separate and autonomous, to varying degrees, from the franchise. Franchise companies sell franchises–branding, systems, access to distribution networks, etc.
Ultimately, it’s the franchisees who sell whatever goods and services are offered under the franchise’s brand; it’s the franchisees who bear the lion’s share of the legal and financial liability for the success of their business; and it’s the franchisees who receive payments from the customers, who employ the employees, who have the contracts with the vendors and distributors, and who realize the profits of the business at the local level.
In a contrasting example, if a business engaged an independent contractor to be its sales agent, the very essence of that relationship is that the agent acts on behalf of the principal, not on the agent’s own behalf. The agent acts as the principal, and represents the principal to the principal’s customers.
Calling an “independent contractor” a “virtual franchise” or “virtual franchisee” or whatever does not make them more than an independent contractor, an agent of the principal, basically an arm’s-length employee or representative of the business / employer / principal. Furthermore, doing so is materially misleading, and might be an element of fraud. Calling an “independent contractor” a “virtual franchise” or “virtual franchisee” might even be an element of fraud.
A wise businessperson would do well to be extremely cautious, skeptical, and wary of any business that engages in Pyramid / Multi-Level Marketing / MLM / or structuring of their business relationships–even if they’re called something else that seems innocuous, like a “Virtual Franchise”. Under federal law, franchisors have to meet certain legal requirements, including offering a Franchise Disclosure Document (“FDD”) to franchisees. If you don’t receive an FDD, odds are you’re not dealing with a real franchise, and the business might be a scam.
Notice: All trademarks used herein are the properties of their respective owners, and are used herein only for instructional and educational purposes.
This article may be freely reprinted or distributed in its entirety in any e-zine, newsletter, blog or website. The author’s name, bio and website links must remain intact and be included with every reproduction. View general information about this license; or view detailed legal information about this license.