Selling a franchise is a complex undertaking because the seller must comply with both state and federal franchise laws. The way some state franchise laws are written, businesses may find that their contractual dealings put them in a franchisor/franchisee situation even if they had no intention of selling a franchise.
It is prudent to consult a franchise law attorney before offering a franchise for sale to ensure that your business is in legal compliance. Companies that are uncertain whether they are required to comply with franchise laws are also advised to seek guidance from a legal counselor familiar with the intricacies of franchise laws.
While many franchise requirements vary from state to state, the sale of every franchise across the country must meet federal requirements. Most of the federal obligations are contained in the Federal Franchise Rule at 16 C.F.R. §436 et seq. and related regulations promulgated by the Federal Trade Commission (the “FTC”).
One of the critical directives in federal law is that a franchisor must provide prospective franchisees an appropriate franchise disclosure document (a “FDD”) at least 14-days before entering into a franchise agreement for the sale of a franchise or accepting any payment connected with the franchise sale. The rule specifies 23 items that franchisors must include in their FDD, along with other required disclosure statements and information. These disclosure requirements are intended to ensure that potential franchisees have accurate and complete information before deciding whether to commit significant resources to the purchase of a franchise.
Federal laws and many state laws place considerable emphasis on the contents and distribution of a franchisor’s disclosure document. Some states require franchisors to register their FDDs annually with the state regulatory agencies.
Under the FTC’s Franchise Rule, a franchisor’s FDD must include basic information, including specified contact information, the trademark that the franchisees will use, and a description of the business. Additionally, the FDD should contain certain disclosure language drafted by the FTC that includes the estimated cost of the franchise investment.
The regulations go into specific detail about the 23 items that must be included in an FDD. Franchisors must supply information about the business experience of its principals, any litigation involving the franchisor or parent companies, financial information about the franchisor, and all of the franchisee’s financial and other obligations.
Many states impose additional requirements for registration or filing of franchises.
States are often referred to as “registration states” if they require franchisors to register the FDD and other franchise information on an annual basis. Registration states currently include:
Franchisors wishing to offer franchises for sale in these states must comply with initial registration requirements, pay the filing fees, and renew their registrations annually to remain in compliance with state law.
A number of other states have “business opportunity” laws which regulates the sale of business opportunities in those states. Although franchises and business opportunities are different, these states will require, under certain circumstances, that franchises be filed before they can sell franchises. Some of these states require annual fillings while others may require a single filing or no filing at all if franchisors utilize a registered trademark with their brand.
For example, in Georgia and Louisiana, franchisors need to file documents with the state if they do not have a trademark registered with the federal government. In Connecticut, Maine, North Carolina, and South Carolina, franchisors without a federally registered trademark must comply with registration requirements.
The laws and obligations vary considerably from state to state, so it is wise to consult a franchise lawyer for assistance in compliance with state franchise requirements. States with business opportunity laws or that are considered filing requirements include:
The remaining states that do not have registration or filing requirements are:
The bottom line is that franchise laws are detailed and often state specific. Both the FTC and various state business agencies can be vigilant about protecting potential franchisors from perceived predatory practices on the part of franchisors.
Therefore, compliance with disclosure and other requirements is crucial to avoid liability. Franchisors are advised to seek legal guidance before offering a franchise for sale. Start by calling today and scheduling a consultation.