Virginia Franchise Registration
Understanding The Law: Franchising in Virginia
Understanding the law: Franchising in Virginia
the legal side of the Franchise Business Model
Franchising is an established growth strategy that can lead to explosive growth with proper vision and execution. From the business side, developing and implementing a successful franchised business demands systems and processes that can be easily replicated, a commitment to operational excellence, and an appreciation for regulatory compliance. The legal side can seem overwhelming, but attorneys can help develop the required legal framework and navigate regulatory hurdles.
The FDD
The most significant legal requirement for franchising a business is the development of a Franchise Disclosure Document (“FDD”). The FDD is required in every state in conformity with the requirements set forth in The Franchise Rule. The FDD is essentially a packet of disclosures designed to inform prospective buyers (“franchisees”) about the franchisor and the costs and obligations involved in operating a franchise. It is unlawful to offer a franchise without an FDD tailored to the specific franchise opportunity.
The disclosures required are specific and often intensive. Developing the FDD and maintaining compliance is best accomplished through a partnership between legal and business leads. With this approach, business leads can focus on fine-tuning and teaching the system, while business minded attorneys identify and help manage risk as they guide franchisors through the compliance hurdles.
Virginia is a franchise registration state
Most franchisors will need to register their FDD in Virginia before engaging in any sales activity in the state. Registering the FDD is a process where the franchisor submits the FDD along with an application and other items identifying the franchisor for review. Franchise registration is typically prepared by legal counsel with specialized knowledge in franchise law.
The State Corporation Commission reviews and approves franchise registration prior to allowing any franchisor to engage in sales activity in Virginia. During this review process, an examiner will be assigned and will communicate any noted deficiencies or concerns. The rules and regulations governing franchises in Virginia are found in the Retail Franchising Act and the Retail Franchising Act Rules. Successful registration results in the registration being declared effective in Virginia.
It is unlawful to offer or sell a franchise in Virginia before the FDD has been registered and declared effective by the State Corporation Commission. While there are some exceptions to registration, they are very limited and do not apply to most franchisors. The consequences of engaging in franchise activity without an FDD or effective registration can be severe.
How to Franchise in Virginia
Registration: An Overview of the Registration Process
Develop the Franchise disclosure document ("FDD")
The first legal step on the journey to franchising in any state is to develop an FDD in substantial compliance with federal law. The FDD is required to be provided to prospective buyers in every state. We suggest working closely with a franchise attorney with specialized knowledge in franchising as you develop your system and plan to offer franchise opportunities. The earlier you start, the better. The process does not occur overnight and you should expect to spend 3-6 months to compile an FDD and properly document your systems and process. Learn more about the FDD.
The Virginia Franchise Application
Once you are ready to offer franchises through a valid FDD, the next step is to get approval to offer franchises in Virginia. This requires registration.
The State Corporation Commission, Division of Securities and Retail Franchising, is responsible for administering the Virginia franchise registration process and enforcing the provisions of the Retail Franchising Act. The Division of Securities and Retail Franchising also answers inquiries, provides investor education programs, handles complaints, performs audits, and conducts investigations regarding code violations relating to securities and retail franchising.
The Division currently allows submissions of initial franchise applications and renewal franchise applications by mail and online through NASAA’s Electronic Filing Depository (“NEFD”). Mailed applications must include a complete print copy, a cd-rom with PDF copy, and a cover letter containing a representation that all of the information contained in the electronic file is identical to the paper documents. The fastest way to register a franchise in Virginia is by filing electronically through NEFD.
If you use NEFD to register a franchise in Virginia, all materials requested by the State Corporation Commission can be easily uploaded to the online portal. This allows for a quicker turnaround time. The application process typically takes 1-8 weeks from submission to approval.
Whats included in the virginia franchise application?
Uniform Franchise Registration Application
Virginia requires initial applications to be submitted on the Uniform Franchise Registration Application (Form A).
Total Costs and Source of Funds
Virginia requires submission of Total Costs and Source of Funds (Form B), which discloses the franchisor’s total costs of fulfilling pre-opening obligations and identifies the source of all required funds.
Uniform Consent to Service of Process
Virginia requires submission of a Uniform Consent to Service of Process (Form C), which designates the Clerk of the Virginia State Corporation Commission as the franchisors agent for service of process.
The FDD
Franchisors provide a copy of the FDD with the application. The FDD includes a copy of the franchise agreement and any other contracts a prospective franchisee will be asked to sign. This may also include a Virginia specific addendum.
Audited Financial Statements
Franchisors must include audited financials in the FDD and provide a letter from the auditor granting consent for the audit report to be included in the FDD. Virginia does not allow phase-in audits or an unaudited balance sheet for start-up franchises.
Payment of the Filing Fee
Virginia Franchisors must pay a filing fee to the Treasurer of Virginia in order to file any franchise application, renewal, or effective amendment. The current filing fees are listed below.
Registration and Compliance
Submission of the Virginia franchise application starts the process. The next step is for review and commentary. The franchisor may have to make certain changes to obtain registration and offer franchises in Virginia.
Review and Commentary
State regulators will review the content of the FDD and application. If regulators observe missing content in the FDD or have questions about disclosures, they submit a comment letter and ask that changes be made. The FDD is a large document. Franchisors highlight the changes by providing a redline copy of all changes.
Virginia Specific Requirements
Regulators may impose certain Virginia specific requirements. For instance, if the companies financial stability is questionable state regulators will impose certain requirements to safeguard a franchise buyers investment until the franchisor has completed their obligations. This type of requirement is known as a franchise fee deferral.
The Effective Date
The registration process is completed when the regulator declares the registration effective. This occurs after the franchisor has addressed all comments to the satisfaction of the State Corporation Commission. The application is accepted and the FDD is assigned a state effective date (the “Effective Date”). The FDD will have one issuance date (the “Issuance Date”), but will have different state Effective Dates.
Compliance and Annual Updates
Selling Franchises in Virginia
After the registration is Effective, the FDD can be disclosed to prospective franchisees in Virginia. There is a 14-day waiting period required under federal and state franchise law where the franchise agreement cannot be signed and funds cannot be paid to the franchisor. After the waiting period is observed, a prospective franchisees can sign a franchise agreement to begin operation under the franchise. Calculation of the waiting period does not include the day the FDD is disclosed or the day the franchise agreement is signed. The franchise agreement is the contract between franchisor and franchisee establishing each party’s rights and obligations in operating a franchise. Franchisees should review the FDD during this period.
Annual Registration
Virginia franchise laws provide for annual registration. Once made effective by state regulators, the registration expires at midnight on the anniversary of the effective date. There are annual renewal requirements for a franchisor to follow in order to continue offering franchises. The Virginia franchise registration renewal application and renewal fee must be submitted prior to expiration if the franchisor wants to continue to offer franchises in Virginia. There may be a period of time between expiration and renewal where a franchisor cannot offer or sale franchises.
Periodic Amendments on Material Change
Virginia franchise law requires franchisors to submit amendment applications in the event of any material change in the business. These post-effective updates are completed through an amendment to the franchise application. Like a renewal, an amendment can result in a brief “black-out” period and there is a fee associated. To avoid prolonging this black out period, Virginia permits franchisors to continue operations once they file the amendment if the include certain assurances with their application.
Annual Updates
Federal law requires the FDD to be updated within 120 days of the fiscal year end. Ideally, the FDD renewal and state registration will closely track. It is best for the periods to track because federal law prevents closing on an “expired” FDD and state franchise law requires a registration amendment on any material change, which may be included in the new FDD. Updating both allows franchisors to best maintain compliance with the form and substance of the law.
Virginia Franchise Registration Filing Fees
As of 2024. Please also note, an untimely filing is charged as an initial registration,
Does virginia have franchise laws to help franchisees?
Virginia has a few franchise specific laws that benefit franchisees located in the Commonwealth of Virginia. Primarily, no franchise can be terminated without good cause. Agreements are also void under some limited circumstances. If a franchise agreement is terminated in violation of one of these laws, a franchisee can pursue a civil claim and seek to recover damages and reasonable attorney fees. The State Corporation Commission also follows guidance from the North American Securities Administrators Association (the “NASAA”). Recently, the NASAA recommended, and participating states have deployed, a prohibition on franchisors disclaiming liability through certain questionnaires and provisions.
Understanding federal franchise requirements
Federal Franchise Law Applies in All States
Federal Franchise Legal Requirements
The federal Franchise Rule establishes the minimum requirements for franchisors to follow when offering or selling franchises in the United States. Federal laws apply in every state regardless of where the franchisor or franchisee is located. Federal laws prescribe the content of disclosures and establish the minimum rules surrounding the sales process. However, there is no federal franchise registration process or requirement. Thus, the federal government does not review the content of a franchisors disclosure document. Enforcement is largely left to state regulators and franchisees who bring law suits.
Franchise Registration and Disclosure
A franchise opportunity can only be offered through disclosure of a franchise disclosure document (the “FDD”). Thus, the FDD is the primary legal document required by all franchisors. This disclosure document must be prepared before offering franchise opportunities in any state and before the registration process can begin. Each FDD contains 23 separate ares of disclosure known as “Items”. The disclosure includes a standard franchise agreement, along with any other contracts required to be signed by the franchisee to begin operating a franchised business. The federal requirements and content of the disclosure document are more thoroughly explained in our federal law resource guide.
Purpose of the FDD
As a franchisor, maintaining compliance and establishing expectations is essential to building a successful franchise system. The FDD discloses aspects of the business and establishes the ground rules for the franchise relationship. As a prospective buyer, the Items in the FDD are designed to help you make an informed purchasing decision before you sign a franchise agreement. Understanding the contents is essential when conducting due diligence.
What is a Franchise?
These three elements make a franchise a franchise
Right to Operate
The buyer will obtain the right to operate a business that is identified or associated with the seller’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark
Degree of control
The seller will exert or has authority to exert a significant degree of control over the buyer’s method of operation, or provide significant assistance in the buyer’s method of operation
Exchange of money
As a condition of obtaining or commencing operation of the business, the buyer makes a required payment or commits to make a required payment to the seller or its affiliate. In Virginia, this includes any direct or indirect payment of at least $500.
Franchising Occurs When An Oral Or Written Deal Satisfies Each of These Elements
The Role of a Virginia Franchise Attorney
helping Franchise Buyers
- Developing and implementing a plan to franchise
- Drafting the franchise disclosure document (the “FDD”)
- Drafting the franchise agreement and all franchise contracts
- Securing franchise registration in Virginia and across the United States.
- Disclosing prospects and sending franchise agreements
- Managing and resolving franchise disputes
- Providing day-to-day franchise legal support
Helping Franchise Sellers
- Nationwide and Virginia FDD review
- Nationwide and Virginia franchise agreement review
- Comprehensive franchise legal review report
- Consultation and legal advice on rights and obligations
- Consultation and negotiation on business legal terms
- Direct dispute resolution and litigation
- Day-to-day legal support
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