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Lanard Law Blog
Legal Requirement To Franchise A Business
What do you need to know to create a franchise of your business from a legal perspective? You have a successful business concept. You may have even had inquiries regarding buying a franchise of the business concept. To franchise your business you will need a federally registered trademark, compliance with the FTCs requirement of a disclosure document (FDD) and legal compliance with certain state requirements. This post will discuss the legal aspects of franchising your business.
First, you must have a federally registered (or at least applied for) trademark with the US Patent and Trademark Office. Registration of your name and logo will protect the name and logo from others attempting to copy your name and/or logo. However, you should know that anyone using the name or logo prior to your use, has priority rights to that name and/or logo for their marketing area. The trademark and other intellectual property (trade dress, etc.) is the cornerstone of what someone will be licensing from you when they buy a franchise from you.
Next you will need to comply with the FTC requirements of disclosure. The FTC, and several states, require that a franchisor provide a disclosure document, known as an FDD, to a prospective franchisee at least 14 days prior to a prospective franchisee signing a franchise agreement. This disclosure document must contain specific information in 23 required items that disclose such details as background about the franchisor and its affiliates, predecessors and parents, as well as competition and regulations in the industry, bios of the key individuals involved, bankruptcy and litigation history of the company and key individuals, the fees payable to the franchisor and its affiliates, estimated costs of starting the franchise, how a territory is given (based on what factors), etc. The responses to these 23 items must be very specific and detailed and cannot be misleading in any way.
The FDD must also contain a copy of the franchise agreement and any other contracts that a franchisee will be required to enter into with the franchisor (for example, software license agreement, area development agreement, etc.) and the three most recent years of audited financial statements of the franchisor.
As you can discern from this brief overview of some of the legal requirements of franchising a business, compliance with the FTC's disclosure rule is a lengthy, time-consuming legally intensive process. Registering the FDD with those states that require registration, can lengthen the process even further. The FDD must be updated at least annually, and sooner, if a material change has occurred during the year which requires new disclosure.