Complying with Franchise Sales Laws

Franchising can be an excellent way to expand a business, but franchise rules are complex. Preparing the Franchise Disclosure Document (FDD) is just the first step. There are additional federal and state laws and regulations that apply to offering or selling franchises. Those who will be marketing and selling the franchise can easily run afoul of these laws resulting in significant liability. As a result, compliance training is essential for franchisors, relevant staff, and sales personnel.

Under the FTC Rule, there are specific requirements related to the timing and format of delivery of the FDD to prospective franchisees. FTC regulations provide that prospects must be given the FDD at least 14 calendar days before the franchisee signs a binding agreement, including the franchise agreement, or makes a payment in connection with the sale of a franchise. Note that states may have their own requirements (e.g., New York uses 10 business days) and franchisors must comply with both federal and applicable state laws. Franchisors should also obtain a signed and dated receipt from the prospective franchisee when they deliver the FDD. This will enable the franchisor to document compliance with these timing requirements.

Certain conduct is considered unlawful under the FTC Rule, including misrepresentations or claims that contradict information required to be disclosed. In addition, franchisors cannot make financial performance representations except in Item 19 of the FDD, which imposes strict requirements.

Some states also prohibit specific practices in the offer and sale of franchises.

Prior to finalizing a sale, the franchisor’s “franchise compliance officer” or attorney should review all documents to confirm that all required information is included and accurate. “Execution ready” versions of the franchise agreement and related agreements must be given to the prospect in compliance with FTC and state laws regarding timing and disclosures.

There are rules governing  annual updates and material changes to FDDs. In the context of a prospective sale to a franchisee, generally, franchisors should  provide the updated or amended FDD to prospects who received the old document but did not purchase the franchise prior to the event requiring the amendment.

Some states require franchisors to register their FDD or file a notice prior to offering a franchise within that state. Franchisors may also have to file a copy of all proposed advertising prior to using the advertising in the state. Other state requirements may include filing a Franchise Seller Disclosure Form for each person who will be involved in the sale of franchises and separate registration for third-party brokers.

It is important to remember that laws vary by state so care must be taken to verify which laws apply. Franchisors may not advertise, make offers to sell, or make actual sales, in any state unless they have complied with these rules.

Franchise rules are highly specific and as such it is essential to have the assistance of an experienced franchise attorney. She can educate you and your representatives on how to comply with the various laws until you are comfortable with moving forward on your own. If you are considering franchising your business or need assistance with compliance with franchise sales laws, contact Lusthaus Law for a consultation.