Whether to give the green light to franchising a business is a complex decision. While franchises may yield avenues of opportunity for expansion and profit, a business owner should also be aware of the possible bumps along the road in the franchising process. To provide a general roadmap for potential franchisors who are considering going down this street, I recommend at the outset paying attention to these signs:
SPEED LIMITS: Both the federal and state governments place limits on franchising to which a possible franchisor must be alert. The U.S. Federal Trade Commission (FTC) and various state agencies regulate franchises, and state laws may differ from state to state.
SLOW DOWN: With the assistance of legal counsel, a franchisor typically prepares a complex disclosure document called a Franchise Disclosure Document (FDD), which satisfies federal and state requirements for disclosing 23 items to prospective franchisees. While preparing this document is tedious and time-consuming, it not only ensures compliance with federal franchise laws, but also has value as a marketing tool. Among the items required to be disclosed are the franchise fees, initial investment requirements, renewal and transfer rights, and other restrictions on and obligations of both parties.
RIGHT OF WAY: The prospective franchisee has the right to receive the FDD at before signing any agreement or paying any money to the franchisor. In addition, the franchisor must observe another right of way by turning over a completed franchise agreement and providing specific regulated time for review before the prospect signs any agreement or pays any money.
STOP: While the FTC does not require registration of franchises, some states require registration before a business owner can proceed through the franchise intersection. The state registration rules vary somewhat in the amount of their filing fees, their acceptance of the FDD, the effective period of registration, and the renewal and updating requirements. In addition, states may have regulations governing advertising for the sale of franchises and filing of information about franchise salespersons.
WATCH FOR POTHOLES: Red lights and no turn signs abound in the area of state laws regulating the relationship between franchisor and franchisee. Several states impose restrictions on a franchisor’s right to terminate a franchise agreement without good cause, its right to not renew the franchise, its right to block the transfer of the franchise without good cause, its obligation to repurchase assets at the end of the relationship, and other limitations.
HIGH GEAR: Franchisors need to shift into high gear still further to prepare the training and operations manuals that franchisees follow. It is worthwhile to have legal counsel assist with drawing up and reviewing these detailed materials as well.
In sum, the safest route to franchising is not the fast lane. Rather than darting into franchise traffic quickly, it is prudent to gauge the risks and opportunities in consultation with an experienced business attorney. Only then, after proceeding with caution, should a potential franchisor move full speed ahead.
THIS ARTICLE IS NOT INTENDED TO PROVIDE LEGAL ADVICE. IF YOU WOULD LIKE TO DISCUSS HOW THIS INFORMATION RELATES TO YOUR SPECIFIC SITUATION, PLEASE contact us.