Establishing a franchise business requires compliance with franchise laws. Each franchise must undergo an essential legal process to expand its unit. A franchise enables a company to expand its brand in another territory more than an independent business. With a pool of support from the franchisor and other franchise units, a franchise business creates job opportunities and economic support for locals.
However, franchise parties have legal rights and obligations for selling and purchasing the business. Franchise laws must be followed by franchise businesses when creating franchise terms and safeguarding trademark rights. The more you reduce the risk in a franchise business, the more money you can make. With the assistance of an experienced franchisee attorney, you can create a legally compliant franchise business outside of territories.
Understanding Franchise Laws
Franchise laws combine federal and state laws. They govern the offer, sale, registration and relationships between franchisors and franchisees. If you start an independent or franchise business, you must understand franchise laws in that state. Here is a detailed summary of a franchise law:
Federal franchise rule
The Federal Trade Commission issues the Federal Franchise Rule, which governs the state’s sale and offer of franchise businesses. If you have serious concerns regarding the franchise offer, you can go through the guidelines issued by the state where you seek franchise business.
Federal Trade Commission
The Federal Trade Commission, a federal agency, enforces and upholds the Federal Franchise Rule and federal franchising law.
State Franchise Laws
The franchise laws also include rules and regulations that each state may pass. If a state still needs to pass its franchise laws, then only the federal franchise rule shall be applicable in that state.
However, many states have passed their franchise laws, rules and regulations. Therefore, before commencing the franchise business, you must check whether the state franchise laws are specific or common.
Franchise Registration
A franchise registration state requires franchisors to register their FDD before offering or selling a franchise within that state. Therefore, you must renew and update your FDD state registrations annually. Also, some states maintain franchise registrations, so check on the list before you try to main federally registered trademarks of your brand.
Franchise filing
States that require a filing or notice with the state but do not require a franchisor’s FDD to be registered are known as filing states. Therefore, check whether you have filed your franchise business and trademark with state laws.
However, unlike registration states or filing states, some non-registration states do not require you to register its FDD or submit a filing or notice with a local state regulator. If you are expanding your business there, ensure you get your agreement draft with an experienced franchisee attorney. It will prevent you from any legal conflict.
Franchise disclosure law
As federal mandates, the franchise disclosure law enables the franchisor to disclose and provide a prospective franchisee with the franchisor’s current and compliant franchise disclosure document. This should be done within 14 days of the signing of the franchise business.
When a franchise business seeks expansion, it undergoes several legal structures. From FDD to trademark registration, the franchisor ensures a legally binding alliance with the franchisee.
What is a Franchise Disclosure Document (FDD)?
The FDD outlines the role of both parties in the franchise business regarding their honest decision and investment in the industry. The document outlines how the investment will work for the potential franchisee, a different practice in different types of franchisee businesses.
Therefore, the FDD becomes the crucial source of information, stating the FTC requirements and transparent relationship between both parties.
Important Areas of the Franchise Disclosure Document
The FDD contains crucial information for prospective franchisees about to make a sizable investment. The sections that must be included in every document are:
- The section regarding how long a franchisor has been operating.
- Describes the executive team’s background in managing the franchise system.
- Includes past, present, and material actions taken against the franchise.
- Disclosure is required for bankruptcies involving the franchise, its predecessors, and its affiliates.
- Any fees that a franchisor charges franchisees must be disclosed.
- A franchisor must be cautious about disclosing all charges and must be completely transparent because any hidden or undisclosed fees could later become a point of contention.
- Outlines the conditions of any financing arrangements
- Outline the Renewal, termination, transfer, and dispute resolution process.
There are many other factors that may affect the franchise business in the future. If you are an experienced franchisor with a prospective franchise, you must get the FDD draft through a franchisee attorney. They will add all the terms and conditions satisfying both parties. Mutual consent is crucial in the franchise business.
How can a franchisee attorney help?
Navigating the franchise business laws is a rare practice. Each state and federal law governs the franchisee business, its aspects, and other approaches. Therefore, choosing a local franchisee attorney with adequate state and federal law knowledge is mandatory. They can help you with:
- Examining franchise disclosure documents and agreements, if inaccurate, they alter it with mutual consent.
- Court litigation and arbitration also act as mediation if required.
- Drafting franchise agreements and disclosure forms for use both domestically and abroad.
