The franchising industry is growing every year, and in the last 25 years, the number of franchises in the country has doubled. However, despite its growth, many people who venture into franchising, including franchisors, don’t understand the laws and regulations governing franchises.
While the legal aspect of franchising is complex, understanding the laws and rules of franchising can help you remain compliant and avoid liabilities.
What you need to know
Franchise laws are governed by both federal and state laws, which oversee the registration, sale, and offer of franchises. These laws also govern the legal relationship between a franchisor and a franchisee. In the United States, the Federal Franchise Rule is the overall franchise law that regulates all franchise transactions throughout the fifty states. The Federal Trade Commission regulates it.
However, it’s vital to note that franchise laws may differ by state. Hence, staying up to date with the specific franchise requirements for your state is vital.
As a franchisor, you’re required to provide prospects with information describing the business and legal relationship between you and your franchisee before the sale or offer of a franchise. As for contracts, finding a franchise lawyer is your best bet at understanding the obligations of your franchise.
The contractual obligations of a franchisor can contain a lot of jargon, and some still count even after you terminate or sell your franchise. Two main documents control the franchisor-franchisee relationship. These are:
1. Franchise Disclosure Document (FDD)
The FDD’s main aim is to provide potential franchisees with information about a franchise, the franchisor, and the contracts or agreements they need to sign before making an informed decision. Therefore, a franchisor is required to provide correct and factual information to avoid claims and liability.
The FDD also includes the franchisor’s financial statements and the actual franchise agreement. By law, you cannot offer or sell your franchise unless you present an FDD to a prospective franchisee. Additionally, there are 14 states that require you to register your FDD with them before conducting any franchise activities. You can learn more about these states once you contact your franchise lawyer to ensure you comply.
The FDD also includes information such as:
• Other franchisees in the system
• Franchisor’s litigation and bankruptcy history
• Territory rights
• Franchise’s key staff
• Required purchases and investment
• Responsibilities of the franchisee and the franchisor
Since the FDD is governed by a 14-day rule, franchisees have fourteen days to think about the contract before signing.
2. Franchise Agreement
The franchise agreement contains details about the relationship between the franchisee and the franchisor. Some of the information included in the franchise agreement is:
• The franchise system, e.g., products and trademarks
• Assistance, training, and advertising
• The duration of the franchise
• The obligations and rights of the parties involved
Tips for staying compliant
Every franchisor needs to perform monitoring compliance for the development and growth of their franchises. Failure to do so can result in hefty fines and lawsuits. To remain compliant, a franchisor must observe the following:
1. Ensure all your FDDs contain all the information required by the state and federal law. Remember, a franchisee can take action if they feel they joined your franchise due to false or misleading information.
2. Provide your franchisees with incentives to ensure their compliance. Monetary incentives motivate your franchisees to accomplish specific actions.
3. Hire a franchise lawyer to help you navigate and understand the franchise laws in your state. This is vital in ensuring you are up to date with all the regulations. It also helps you avoid unnecessary lawsuits that can be detrimental to your business.
4. Clearly identify your franchise’s guidelines in writing. This way, if a sensitive compliance issue comes up, you’re able to review your policies and come up with an effective solution.
With these tips, franchisors can remain compliant, competitive, and conduct businesses with like-minded franchisees.