May 24th, 2023
If you are like so many of my clients, you are an expert at your craft, and you have reached a level in your consulting, coaching, or professional services business where you are considering offering training in the form of a certification program to others in your field of work to not only support them in their own professional development, but to also expand the reach and impact of your system, frameworks or methodologies.
If this feels like a fit for you, read on!
Creating and launching a certification program comes with some tremendous benefits and some significant pitfalls and risks if you are not aware of the ways that you can accidentally slip into the world of (illegal) franchises.
Creating a franchise model is not something you want to do unintentionally!
There are both federal and state laws that govern the creation of franchises, and it can be an expensive endeavor, particularly if you do this by accident, because you may be required to “give all the money back”, could be hit with treble damages, and also some pretty significant fines and penalties.
I decided to put together this brief article because I have had a series of clients show up recently with their “certification” program already in progress or structured, and upon review of their draft / proposed documentation, can see that what they have actually created is an illegal franchise.
It’s challenging in these circumstances to tell a client “Do not pass go!!” – but that is my job.
And so this is also a reminder to get legal support with structuring your certification program before you create and launch it! You do not want to launch only to find out that you are breaking all the rules and that you may have to unwind some things to prevent even further risk to your business or damage to your future opportunities. (For example, if you actually decide to franchise at some point, and you have already done it illegally, you could face some major obstacles).
“It does not matter whether you call it licensing, a distributorship, a certification program, a sales representative program, a training program, a joint venture, or even an independent contractor scenario – if you have it structured wrong and you meet the definition of a franchise, you have created an illegal franchise.”– Heather Pearce Campbell
Of course, this brief article does not cover everything you would need to know, but is a basic outline of some primary considerations as you move forward in this area.
1. The Upside of Certification Programs for Consultants
As a business owner or consultant, one of the most effective ways to scale your business and broaden your reach is through certification programs. These programs can allow you to train others in your proven systems or methods, creating a ripple effect of expertise. By leveraging your intellectual property in this manner, you not only grow your brand’s visibility and reputation, but you also open new streams of income. It can position you as a thought leader in your industry, create brand ambassadors who are certified in your methodologies, and extend the impact of your work beyond your immediate client circle.
2. Certification versus Franchising: Understanding the Difference
While the benefits are promising, it’s crucial to tread with caution when implementing these programs, as it’s easy to slip into the territory of creating an unintentional franchise. At first glance, certification and franchising might seem similar, as both involve leveraging your intellectual property and systems. However, franchising involves providing significant assistance or control over the franchisee’s method of operation, along with the payment of a franchise fee. This model has stringent federal and state regulations that must be strictly adhered to, or else heavy penalties could be levied.
3. Compliance with Franchise Laws
If your certification program unintentionally fulfills the three conditions of a franchise – namely, the franchisee’s use of your trademark, payment of a fee, and your significant assistance or control over their method of operation – it can be legally deemed as a franchise. Thus, a careful evaluation and potential restructuring of your program might be required to ensure compliance with franchise laws. This may include reconsidering the level of control you have over the certified party’s operations, the kind of ongoing support you offer, and the nature and structure of the fees you charge.
4. A Balanced Approach to Certification Programs
To avoid potential legal complications, ensure that your certification program is designed as a means to educate and certify, not to control or manage the business operations of those being certified. Make sure the relationship between you and your certified participants is primarily an educational one, rather than a business partnership. Fees associated with your program should be clearly defined as payment for education, training, and certification, not a percentage of their revenue or profit.
5. Working with Legal Experts
Given the complexity and potential risks involved, it’s highly recommended to work with a business or franchise attorney when setting up your certification program. An attorney with sufficient knowledge of franchise laws that can help you review your certification program, its structure, and fees to ensure you are not inadvertently stepping into franchise territory. Creating a successful certification program that enhances your business growth while ensuring legal compliance is a delicate process, but with the right approach and professional guidance, it can be a substantial addition to your business model.
I have helped numerous clients launch certification programs with the appropriate documentation in place to protect their IP, properly define the certification program, as well as the rights and obligations of the certification program participants. If you have questions about launching your own certification program, you are welcome to get in touch or schedule an initial consultation here.
To illustrate the point above, let’s look at three scenarios below:
Business Marketing Consultant sets up a “Certification Program” where he uses a “mark” that is not registered as a certification mark (i.e. “Insight Certified”*), which is substantially similar to or associated with his primary business (for example “Insight Consulting, LLC”*), which mark participants can use in association with their services moving forward; he provides training and education in his “Certification Program” in exchange for payment, which includes ongoing access to materials / documents / or tools that he licenses to the Certified participants who may continue to utilize these resources in their businesses in exchange for a fee (annual or otherwise). The materials must retain their original branding. And in order to remain “Insight Certified” participants are also required to remain current on any ongoing trainings, support etc. that is offered by his primary business.
In this scenario has the consultant created a certification program or an illegal franchise?
*Using fictitious names for this example.
Much like the scenario above, a Fitness Coach offers a “Certification Program” where she uses a “mark” that is not registered as a separate certification mark (separate from or not substantially similar to the primary brand name or identity); she provides training and education in her “Certification Program” in exchange for payment. She provides ongoing access to materials / documents / or tools that she licenses to Certified participants who may continue to utilize the resources in their businesses so long as they maintain the brand identification on the documents / resources etc. To remain certified, the participants are also required to remain current on any ongoing trainings or support offered by the Coach’s primary business, and the Coach invites other Fitness coaches certified in her program to work as independent contractors, providing fitness coaching support utilizing her methods & I.P. to “overflow clients” that she directs or funnels their way.
In this scenario has the coach created a certification program or an illegal franchise?
A consultant who has also developed his own software platform hires “sales representatives” as independent contractors to enroll Clients in group masterminds designed for entrepreneurs & business owners (capped at 6-8 people each), and pays the independent contractors 70% of the total services fee (sharing the royalties), which includes individual access to Company’s software platform (under Company’s brand) to support the participant’s progress through the mastermind. Consultant also requires that independent contractors undergo / participate in training / education to be able to qualify to lead the mastermind programs, that they agree to a non-compete clause, and that they meet ongoing training requirements (which participants must pay for). Consultant further requires that the contractors lead the mastermind, appropriately deliver on the services, provide back-end support, and participate in numerous reporting requirements.
In this scenario has the consultant created a sales representative program, a distributorship, a certification program or an illegal franchise?
It may surprise you to learn that in each of these scenarios, what has been created is actually an illegal franchise. (Further, there are some major red flags in the employment law arena with two of these scenarios which would not pass the true “independent contractor” sniff test – I will post another article shortly on this topic, which is also timely as I continue to see some really questionable practices in this arena).
So, how do you create a certification program that does not cross over into an illegal franchise? As a starter, you adhere to the following guidelines:
- You collect payment for the initial training / education only.
- You obtain a certification mark that is distinct from your brand and is only used by your certified participants, not by your primary business or brand.
- You do not have ongoing obligations or financial relationship or requirements after the certification has been completed.
- You do not provide additional marketing, programming, or training support.
- You certify any service, product, individual, or business who qualifies.
- You do not limit the use of the certification (with a non-compete, with ongoing training or other requirements that permit you ongoing financial benefit).
- And you do not permit any licensees to use the mark as a source identifier for the goods or services being offered.
Even then, because franchise businesses are regulated both at the federal and state level, laws in certain locations differ. There are several states where you only need to meet TWO of the THREE elements that comprise a franchise, and boom!, you have an illegal franchise.
Of course, client scenarios are rarely this black and white.
I am so often approached by experts who have modeled the structure of their program or their business after something they have seen “in the marketplace” — and they think because it is being done (and is being done “successfully!”), it must be okay.
But there are more and more regulatory eyeballs being turned to business practices that “look like” franchises but are being called something else.
And it doesn’t matter what you call it.
Once you have a regulatory body or agency with eyeballs on your business and beginning an investigation, it is very difficult to unwind. The thing that caught their attention is likely still present in your business and cannot be explained away with an “I didn’t know any better.”
You are presumed to know the law.
Just like you are presumed to know the speed limit when you are driving down the freeway at 75 or *unkowningly* zipping through a school zone at 35 mph instead of 15.
You are presumed to know the law. All laws that apply to your business. (Including franchise laws. And many of my clients don’t *know* essential business, marketing, IP laws, let alone franchise laws. It’s not a judgment, just the truth. Which is why you have to work with experts on your business building journey).
All it takes is a disgruntled participant filing a complaint, the wrongful conclusion to a certification or licensing program, or a regulator coming across the language on your website or other marketing materials making these “program” offers, or being investigated due to an employment scenario, to rip an illegal franchise scheme wide open and subject you to the return of all monies earned, treble damages, penalties and fees AND the added payment requirements to become properly franchised.
Creating an unintentional or illegal franchise is not a road you want to go down accidentally. It is certainly one you don’t want to go down *intentionally* either.
But with the help of a skilled business law or franchise attorney who can help you really assess your goals and desired outcomes before you launch an illegal franchise inappropriately labeled as a certification program, a licensing scenario, a distribution or sales representative program, or a joint venture, you may have opportunities to re-structure the way you offer your services that still achieves your goals.
You may even decide to put a proper franchise model in place to help you grow your business, message and impact! Creating a franchise has some significant benefits including risk reduction across multiple areas of the law, greater control over your brand and the use of your I.P., and the ability to better protect your reputation as you grow.
Again, if you have questions about ways you might grow or build your education or information-based business as an expert or consultant, get in touch or schedule an initial consultation here.
To your success!
© 2023 Heather Pearce Campbell, The Legal Website Warrior®
DISCLAIMER: THE INFORMATION PROVIDED IN THIS ARTICLE MAY CONTAIN LEGAL INFORMATION, BUT DOES NOT CONSTITUTE LEGAL ADVICE. NO RELATIONSHIP, INCLUDING ATTORNEY-CLIENT RELATIONSHIP, HAS BEEN FORMED AS A RESULT OF THIS POST. YOU ARE ADVISED TO SEEK THE ADVICE OF AN ATTORNEY LICENSED IN YOUR STATE IF YOU HAVE ANY QUESTIONS.
If you are interested in more information on business planning then visit these other posts…..