In recognition of the difficulties inherent to creating a franchisor-franchisee relationship, North Carolina law requires that franchisors maintain compliance with the Federal Trade Commission’s Amended Franchise Rule, 16 C.F.R. §436. If a franchisor is in compliance with the Amended Franchise Rule and is selling franchises in conjunction with a federally registered trademark, then they are exempt from any registration requirements in North Carolina. Nevertheless, the franchisor must still provide prospective franchisees with a franchise disclosure document (FDD) as required by the Amended Franchise Rule. If the franchisor does not have a federally registered trademark, they must add additional disclosures to the FDD and provide copies of it, along with a consent to service of process, to the North Carolina Secretary of State before offering their franchise opportunity to any potential buyer in North Carolina.
While the Amended Franchise Rule provides guidance on the format that the franchise disclosure document must follow, the specific content of the document is largely up to the franchisor. Aside from meeting the long list of requirements, this disclosure document must be tailored to meet the franchisor’s personal goals for and expectations of its franchisees. A knowledgeable lawyer can help a franchisor understand the function of its franchise disclosure document as a sales piece while maintaining compliance with the Amended Franchise Rule and North Carolina Business Opportunity Sales Act.
The Federal Trade Commission is essentially a consumer protection agency. The FTC makes rules that ultimately seek to protect consumers from making poor investments or being taken advantage of. This is why the FTC Amended Franchise Rule requires every franchise agreement to be surrounded by hundreds of pages in a franchise disclosure document. The purpose of an FDD is to explain in plain English the terms of a franchise agreement. The franchise disclosure document should put the prospective franchisee on notice of all of its rights and obligations under the contract.
For instance, an agreement might state that a franchisee must build, develop and operate a restaurant. However, Item 7 of that franchise disclosure document will break down the estimated initial investment for that particular restaurant. There will be a table that shows the prospective franchisee how much they should expect to spend on things like equipment, a lease, and professional fees. All of that information goes above and beyond the terms of the actual contract. Every franchise disclosure document contains a wealth of information for prospective franchisees, and they should review the entire disclosure and not just the franchise agreement.
If you have a successful business in North Carolina, and you’re trying to figure out how to expand it without stretching yourself any thinner, franchising could be an option for you. You may be looking to generate more revenue without taking on the risk involved with expanding your business the traditional way. If you have a business model that works and a desire to grow, then you should talk to a North Carolina lawyer about expanding your brand through franchising.
The North Carolina Business Opportunity Act requires some franchisors to register their franchise disclosure documents with the Secretary of State. A failure to follow the North Carolina rules may lead to a rejected business opportunity application and serious legal trouble.