Franchising can be an excellent way to expand a business. A successful company can reach new customers, increase revenue and expand its brand recognition, while other parties take responsibility for individual locations under the company’s guidance. However, before a franchisor can offer or sell franchises, it must comply with various federal and state laws and regulations. An experienced franchise attorney can guide franchisors through this process. Lusthaus Law works closely with franchisors to help
ensure they avoid costly mistakes.
Federal Trade Commission Franchise Rule
Franchisors must first create a Franchise Disclosure Document (FDD). This document provides relevant information to enable franchisees to make educated decisions about purchasing a franchise. An FDD is very detailed and includes information about the franchisor, the franchise system, and the franchisee’s initial investment. Under the Federal Trade Commission Franchise Rule (the “FTC Rule”), the FDD must be shared with prospective franchisees at least 14 days before an agreement is signed or any payment of money is made to the franchisor. In addition, the FDD must be updated at least annually or sooner in the event of a material change that may affect the franchisees conduct or decisions regarding the franchise.
As part of the FDD, the franchisor must draft and provide copies of all agreements that franchisees may be required to sign which may include the following:
- Franchise Agreement
- Territory Attachment
- Non-Competition Agreement
- Lease Rider
- Personal Guaranty
- Release and State-Required Addenda
State franchise sales laws
Some states have additional requirements to protect franchisees. In “franchise registration” states, franchisors must register their FDD prior to selling a franchise within that state. In “franchise filing” states, a notice must be filed with the state regulator before selling a franchise. Often, franchisors are required to renew their registration or notice filing annually and provide necessary financial and business information. Finally, some states do not require either registration or notice so franchisors may offer and sell franchises as long as the FDD is in compliance with the FTC Rule. In addition to these filing provisions, some states also require that the FDD be given to the franchisee within a different time period than provided under the FTC Rule. These varying requirements can easily result in violations if franchisors do not thoroughly check which laws apply.
Franchising a business is a significant endeavor with many legal and business considerations. Before you move forward, consult an experienced attorney to advise you on the steps you must take and the legal rules that apply. Lusthaus Law has a long track record helping franchisors successfully expand their business. Contact us to learn how we can franchise your business.