Advisory Opinion 95-5
This staff advisory opinion is issued in response to your request dated March 10, 1995, for our views concerning "substantial assistance" under the Franchise Rule, 16 C.F.R. § 436.2(a)((1)(i)(B)(2).
Your client proposes to offer for sale a turnkey dry cleaning store. Buyers will acquire the store through a purchase order for certain dry cleaning and finishing equipment. The respective equipment manufacturers will provide a one-year parts warranty. In addition, your client will offer a thirty-day service warranty. After that expiration date, your client will have no further obligation to the buyer for equipment repairs.
Your client will also install the purchased equipment in the store and build out the store's interior. However, your client will provide no direct site selection assistance to the buyer, although it may provide buyers with the names and addresses of up to three unaffiliated brokers. There is no site approval requirement and no assistance with respect to lease negotiations.
You state further that your client may provide buyers, upon request, the names and addresses of three financing companies who may provide the buyer with the financing needed to be able to purchase equipment. However, your client will not provide any assistance to the buyer with respect to creating or instituting financial accounting or bookkeeping practices.
Your client also provides a two-week course at its dry cleaning facility and a manual on operating a dry cleaning plant. The training course and manual will cover subjects such as the use of equipment, work flow, and cleaning techniques. Neither the course nor manual, however, will contain general business advice such as management techniques, marketing, promotion, or personnel matters.
Finally, you state that once the dry cleaning store is operational, the buyer is not obligated to purchase additional dry cleaning equipment and supplies from any particular source, although your client may provide the buyer with the names and addresses of various unaffiliated suppliers. Upon request, your client may also provide buyers with the names and addresses of unaffiliated persons familiar with dry cleaning store marketing.
You now ask whether these types of assistance constitute "significant assistance" under the Franchise Rule.(1)
II. Definition of Significant Assistance
One of the three definitional elements of a "franchise" is significant control or assistance. With respect to "assistance," the Rule states:
The franchisor gives significant assistance to the franchisee in the latter's method of operation, including, but not limited to, the franchisee's business organization, management, marketing plan, promotional activities, or business affairs; Provided, however, That assistance in the franchisee's promotional activities shall not, in the absence of assistance in other areas of the franchisee's method of operation, constitute significant assistance. . . .
16 C.F.R. § 436.2(a)(1)(i)(B)(2).
The term "method of operation" is broad. Indeed, in the Statement of Basis and Purpose accompanying the Rule, the Commission stated that the list of areas noted in the Rule is meant to be illustrative and "by no means lists all possible 'methods of operation.' " 43 Fed. Reg. 59613, 59702 (December 21, 1978).
Further, what constitutes "significant assistance" must be viewed in light of its importance to the franchisee:
In an "assistance" agreement, the franchisor reduces the franchisee's risk of doing business by training or otherwise assisting the franchisee to make the right business decisions. . . . Assistance may include, for example, training, accounting service, management advice, . . . location selection, employment advice, and similar expert help in the area of marketing.
Id. at 59702, n.43.
Similarly, the Final Interpretive Guides to the Rule list the following examples of significant assistance:
Among the significant types of promises of assistance to the franchisee's method of operation are (a) formal sales, repair or business training programs, (b) establishing accounting systems, (c) furnishing management, marketing or personnel advice, (d) selecting site locations, and (3) furnishing a detailed operating manual. . . . [T]he presence of any of [these types of assistance] would suggest the existence of "significant control or assistance."
44 Fed. Reg. at 49965, 49967 (August 24, 1979).
III.The Assistance Your CLient Will Provide Is "Significant"
We note that the training and manual your client provides buyers is limited to the technical aspects of operating a dry- cleaners. Nonetheless, we believe such training may be significant to individuals who lack knowledge about dry cleaning operations. The very reason a would-be buyer might turn to your client, as opposed to starting a dry-cleaners on its own, is precisely because of the knowledge and expertise your client can offer in this field.
Further, training is not the only service your client provides. Your letter states that your client provides other services, including: (1) a thirty-day service warranty on new equipment; (2) installing purchased equipment in the store; (3) building out the store's interior; and (4) supplying the names of site selection brokers, financing companies, and suppliers. Thus, we conclude that training, coupled with these additional support services, are more than sufficient to constitute "significant assistance" under the Franchise Rule.
Please be advised that our opinion is based on all the information furnished in the request. This opinion applies only to your company and to the extent that actual company practices conform to the material submitted for review. Please be advised further that the views expressed in this letter are those of the FTC staff. They have not been reviewed, approved, or adopted by the Commission, and they are not binding upon the Commission. However, they do reflect the opinions of the staff members charged with enforcement of the Franchise Rule.
Date: April 4, 1995
Franchise Rule Staff
(1)For purposes of this advisory opinion, we will assume that your client meets the other definitional elements of a franchise set out at 16 C.F.R. § 436.2(a).