(757) 354-2167 | Located in Virginia Beach and Smithfield
(757) 354-2167 | Located in Virginia Beach and Smithfield
As a successful business owner you may find yourself asking: should I franchise my business? Franchising is an established growth strategy that can lead to explosive growth with proper vision and execution. Our goal as a franchise focuseaw firm is to empower clients and deliver solutions for all business legal needs.
Franchising is regulated on the federal and state level. Federal franchise law requires franchisors to prepare a franchise disclosure document ("FDD") in compliance with the Franchise Rule. The FDD is the primary legal document required to franchise your business. The FDD is designed to provide buyers with the information they need to evaluate your franchise offering and make an informed purchase decision. Some states impose additional requirements for franchisors to follow before offering franchises in their specific state. This state-level process is referred to as franchise registration, or in some cases, franchise filing. The map below is intended to help you visualize franchise laws by state. You will notice we have divided the states into categories. These terms are used in the franchise industry. Please see our FAQ below to better understand the terminology.
Please explore our site for a 10,000-foot overview of franchise law and the franchise registration process from franchise attorneys.
Franchising occurs when an oral or written deal satisfies these three elements:
Businesses must ensure that they are not accidentally franchising. Labelling an agreement a licensing agreement or distribution agreement does not make it so. Attorneys with experience in helping business buy, sell, and franchise focus on the nuances of franchise law to protect business parties.
Why is this important?
An offer of a franchise can only be made through an issued franchise disclosure document. In fact, It is an unfair or deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act to offer a franchise without complying with federal requirements. The sales process cannot start until the FDD is disclosed to a prospect.
Once the FDD is disclosed, there is a 14-day waiting period before any transaction can occur. Calculating the 14-day period does not include the day the FDD is disclosed or the day the franchise agreement is signed. and days may be added if terms are changed in the franchise agreement. During this waiting period, no franchise agreement can be signed and no funds can be collected. After observing the waiting period, the deal is completed by the parties signing a franchise agreement, the contract between franchisor and franchisee.
There are 23 Items in every FDD.
A franchisor cannot offer or sale any franchise offering in any state until the franchisor has an issued FDD. The issuance of an FDD permits a franchisor to do business in the states and territories that do not regulate the offer or sale of franchises (the non-registration states identified in the map above). Franchise offerings are made by disclosing the FDD.
Certain states impose additional requirements specific to franchisors. This can include filing or registration requirements and restrictions on advertising.
Franchisors must provide information on their corporate structure and identify any parent or affiliate entities. Additional information is provided about each entity in order to disclose the nature and experience of the business. Franchisors also describe the franchise offering, the competitive market, and laws and regulations specific to the industry.
Franchisors must disclose the name, title, and business experience of the directors, trustees, general partners, principal officers, and any other individuals who will have management responsibility relating to the sale or operation of the franchise offering. Persons with management responsibility must be disclosed regardless of whether they are employed by franchisor, a parent, or affiliate and regardless of professional title.
Franchisors must disclose relevant litigation history for the franchisor or predecessor, and certain parents or affiliates. Relevant litigation history must also be disclosed for every individual that is required to be listed in Item 2.
Franchisors must disclose any bankruptcy filing in the past 10 years from the franchisor, predecessor, parent, affiliate, officer, general partner, or any individual required to be listed in Item 2.
Franchisors must disclose all initial fees due by a prospect. This includes the initial franchise fee, initial advertising fee, and any other fee paid to the franchisor prior to starting operations of a franchised business.
Franchisors must disclose all other fees that are paid to, or through, the franchisor or an affiliate during the operation of the franchised business. Common fees include royalties, ongoing marketing fees, transfer fees, equipment, cost of goods or services, credit-card processing fees, technology fees, indemnification, or penalties.
Franchisors must provide an estimated initial investment of the total amount a franchisee will need to make as an initial investment in the franchised business. This includes all costs incurred from signing the franchise agreement and launching and operating the franchised business for at least 3 months. This should be based off the franchisors experience and is provided as a range of costs to recognize differences in market and costs of goods or services.
Franchisors must disclosed when they require a franchisee to provide products or services in a particular way or from a particular provider. Franchises in general are designed to require all franchisees to follow the same process and systems; however, the degree of control and the suppliers of the products or services vary by franchise system. When the franchisor provides the services through its entity, a parent or an affiliate, they must disclose revenue gained and compare the revenue generated from required purchases to their total revenue, along with additional information.
Franchisors must disclose the franchisees obligations on an enumerated list of items provided in the rule. A sample of required disclosures includes: site selection and acquisition; pre-opening purchases; site development and pre-opening requirements; training; opening schedule; fees; compliance with policies/operating manual; use of trademarks and proprietary information; development and quotes; advertising; building condition; and other requirements.
Franchisors must disclose the terms for any financing that is offered to franchisees by the franchisor, its agents, or affiliates (directly or indirectly). The terms are specified in the rule. Common financing includes a portion of the initial franchise fee.
Franchisors must disclose whether they have an obligation to provide certain types of assistance in training franchisees, assisting in launching the franchised business, and assistance in operating a franchised business.
Franchisors must disclose the perimeters used to generate a franchise territory and provide certain information regarding the exclusivity or non-exclusivity of the territory. Individual territories are established during negotiations and included in the franchise agreement.
Franchisors must disclose the status of any trademark and provide the ability of franchisees to use the trademark during the operation of the franchised business.
Franchisors must disclose the existence of other types of intellectual property that they provide to franchisees and explain the extent the information can be used by franchisees.
Franchisors must disclose the extent of involvement required by the person signing the franchise agreement during the operation of the franchised business. Franchisors may establish criteria for managing or responsible parties and require certain training and standards.
Franchisors must disclose a franchisees obligation to offer certain products or services and limitations on offering any other products or services.
Franchisors must disclose conditions or requirements for a franchisee to renew the franchise agreement when the initial term is going to expire. Franchisors must also disclose the conditions allowing for termination, dispute resolution, and other obligations under the franchise agreement. This disclosure is made by reference of enumerated items to specific provisions in the FDD and franchise agreement.
Franchisors must disclose compensation or other benefit (such as equity) given or promised to any public figure and disclose the extent of the public figures involvement and investment interest in the company if the public figure is involved in offering or selling franchises. Public figures are commonly referred to as brand ambassadors. Learn more about contracting with a brand ambassador for your franchise.
Franchisors must either (1) disclaim that they make any financial representation or (2) make a financial representation. In either case, the FDD must provide specific pieces of information. Franchisors cannot make any financial representation to a prospect except to the extent disclosed in Item 19. Further, franchisors must have data to backup any representation and provide that data upon request. Learn more about Item 19 from our site or see our blog post: What is Item 19 Financial Performance Representation
Franchisors must provide certain information franchisee owned and company owned locations. The company locations may include business operating under a different name than the franchise offering. This information is provided for the past 3-years and in 5 different tables. The FDD must also contain contact information for all current franchisees and recently terminated or absent franchisees.
Franchisors are required to include a copy of financial statements with the FDD. Established franchisors will be required to provide three years of audited financials in a particular format. There are exceptions to providing audited financials for emerging brands; however, some states require audited financials for registration in their state. Any unaudited financials are provided with an alert advising prospects that the financials have not been audited.
Franchisors must attach a copy of all agreements that the franchisee will be asked to enter into in order to operate a franchised business.
Franchisors must provide a receipt page to document the disclosure requirements and acknowledge that the franchise prospect obtained a copy of the FDD on a particular date.
Certain states regulate the offer or sale of franchises in their state. Franchisors should understand the nuances and work closely with an attorney as they begin to develop short and long-term business plans. States regulate the offer or sale of a franchise to different degrees. Requirements primarily depend on:
It is important to understand that any state requirements are in addition to federal requirements. We have developed a map and placed it at the top of this page to provide an illustration of each states requirements. State franchise regulations include registration, filing and renewal requirements. The differences between state franchise registration requirements are more fully explained in our FAQ below.
After all franchise registration states requirements are met, a franchise offering is made by disclosing the FDD to a prospect in the same manner utilized in franchise non-registration states. It's time to get to work and help franchisees starting a business. Note, some states impose advertising disclosure requirements. A franchise focused law firm will help manage compliance by working with business and marketing leads. Franchisors must ensure all print and electronic advertisements comply truth on advertising requirements generally and with any state mandates. Primarily, states impose filing requirements and require proper disclaimers on advertisements.
States have the authority to impose additional requirements on franchises by passing laws that govern franchise relationships. Explore our site to learn more about franchising in a each state: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming. (Currently under construction, links will be added shortly - Please contact us with any questions).
Franchise law consists of federal and state laws that govern the offer or sale of a franchise in the United States. On the federal level, the Federal Trade Commission has established Franchise Rules (16 CFR Parts 436 and 437). The Franchise Rules are supplemented by laws enacted in certain states. Additionally, the North American Securities Administrators Association ("NASAA") provides guidance on franchise compliance, works with state regulators, and facilitates the transfer of franchise applications to certain state governments. Check out the Table Below Entitled "Franchising State-by-State" for a current list and brief explanation.
A Franchisor cannot offer or sale a franchised business in the United States or its territories without first preparing a complete Franchise Disclosure Document ("FDD") in compliance with the law.
The franchise disclosure document (the "FDD") is a legal document that franchisors are required to prepare, keep updated annually, and provide to prospective buyers interested in operating a franchised business. There are 23 sections of information referred to as Items in the FDD. Each section has specific requirements as enumerated in the Franchise Rule. The FDD is intended to provide information about the franchisor, the franchise system and the agreements that will bind the Franchisor/Franchisee relationship. The goal is to foster informed purchase decisions. The FDD must be provided in every state and territory in the United States.
Franchise registration states are states that impose a registration requirement on franchisors. In these states, the franchisor must submit an application packet that includes a complete copy of the FDD, along with other materials and pay a filing fee. Most registration states review the FDD and will not allow a franchisor to offer or sale franchises in their state until they are satisfied that the FDD is in substantial compliance with all state and federal franchise laws. This is done through comment letters and subsequent updates to the FDD. Fees are imposed for registration and an annual renewal.
Franchise filing states include both one-time filing states and annual filing states. One-time franchise filing states require a franchisor to make a one-time filing or provide notice in order to offer or sale a franchise in their state. Annual franchise filing states require a franchisor to make an annual filing on a state form and pay a filing fee in order to offer franchises in the state.
Certain states have business opportunity laws but do not have franchise specific laws or registration requirements. In these business opportunity states, franchisors are exempt from filing or registering if the franchise offering includes the right to use a federally registered trademark. If the franchisor does not have a federally registered trademark, then the franchisor will likely have to register as a business opportunity in these states. Business opportunity registration requirements may vary by state, but these essentially become franchise registration states if a franchisor lacks a federally registered trademark.
Pursuant to federal law, a franchisor is required to update the FDD within 120 days of the franchisors fiscal year end. In registration states, the new FDD has to be approved in order to be effective in that state. Additionally, the FDD must be updated any time there is a material change in the franchise business.
When the FDD is complete and in substantial compliance with the Franchise Rule it will be assigned an Issuance Date. Upon issuance, the franchisor may begin to offer and sale franchises in states that do not impose additional regulations on the offer or sell of franchises. (See the PDF below).
After the issuance of a valid Franchise Disclosure Document a Franchisor can begin to offer or sale franchises under that document in certain states; however, the Franchisor needs approval before offering under that document in regulating states. A franchisor cannot offer or sale a franchise in a registration or filing state until after the registration or filing is made effective in that state. The requirements for registration or filing vary by state. We recommend filing through the NASAA electronic filing depository whenever possible.
It Depends. Some approvals take weeks and others take months. Filing online through the NASAA electronic filing depository seems to expedite the process. You can't choose the state regulator, but we work diligently to ensure that our clients gain approval as fast as possible. This is vital for initial applications and for renewals.
We provide state-by-state approval tracking for all 50 states in a visually friendly and easy to understand manner for your business, franchise sellers, and brokers to utilize. Our system uses a simple green light / red light alert so that you know when you can and cannot offer a franchise in a particular state.
A Franchise Agreement cannot be be signed until the fifteenth (15th) day after the Franchise Disclosure Document (FDD) is disclosed to a prospect. You do not count the day that the disclosure document is disclosed (Example: Disclose January 1, wait 14 days, sign on January 16). Of course, the FDD cannot be disclosed in franchise registration states or franchise filing states until the FDD is effective in those states.
The offer or sale of all franchise opportunities are regulated to some degree in franchise registration states and franchise filing states; which include: California, Connecticut, Florida, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, Texas, Virginia, Utah, Washington and Wisconsin. It is important to trademark your brand for many reasons. One additional hurdle caused by failing to trademark your brand is the inclusion of business opportunity states that essentially become franchise registration states for franchisors without a registered trademark. These business opportunity states include: Connecticut, Georgia, Louisiana, Maine, North Carolina and South Carolina. We strongly recommend you obtain a trademark for your brand in the early stages of your business.
We aren't franchise consultants, but we review FDD's every day. We know where to look and what to compare. We provide the level of support and advice you want. We can analyze any competitors who offer franchises and provide you with the information you need to understand competitor's models, costs, territory sizes, and growth rates.
The FDD is the primary legal document used to offer and sale franchises. Franchise law is complex and the damages for noncompliance can be severe. Further, the contracts in the FDD will govern the franchise relationship and the rights and obligations of the parties. The better question is, should a lawyer prepare an FDD? The answer to that question is a resounding YES.
Every business is different, but many franchisors will negotiate certain financial and legal terms. Dr. Chester L. Karrass wrote a book entitled: In business as in life, you don’t get what you deserve, you get what you negotiate. Our experience has found this adage to be true in franchising.
Every business is different, but many franchisors will negotiate certain financial and legal terms of the franchise agreement. Dr. Chester L. Karrass wrote a book entitled: In business as in life, you don’t get what you deserve, you get what you negotiate. Our experience has found this adage to be true in franchising.
Certain franchise registration states publish FDD's online for the public to view. Don't pay a third-party for these. They are free on franchise registration state databases!
Try searching here:
We are Virginia licensed attorneys in a Virginia franchise law firm, but that does not mean we can only represent Virginia franchisors. Attorneys are permitted to work in their state while serving business interests across the country. In fact, it would be impossible to locate a franchise attorney licensed in all 50-states and franchisors do not want to work with multiple franchise attorneys. A franchise attorney licensed to practice law in any state can serve your franchise formation needs and file or register your FDD's in any state you wish to do business. We will be in Virginia when we conduct all legal work and will meet with you by phone or video conferencing. If litigation is involved, we are Virginia litigation attorneys and can work with local counsel in other states as needed. The key to finding a franchise attorney is ensuring the attorney is well-versed in the nuances of franchise law and registration. We hope our website demonstrates our knowledge of franchise law and registration requirements.
Dr. Chester L. Karrass wrote a book entitled: In business as in life, you don’t get what you deserve, you get what you negotiate. Our experience has found this adage to be true. Our contract templates are used to conduct over 10B in business each year. We are the law department for your business. We are laser-focused on providing efficient and effective business legal solutions. If you like personable attorneys that deliver results, we are a good fit.