Franchising is regulated by the Federal Trade Commission (FTC) and a variety of individual states. If you are interested in expanding your franchise nationwide, it is imperative that you have registered your franchise properly in the states that require it.
The registration process for franchisors can be an arduous and intimidating one for a franchisor regardless of how many years they have been in existence. Many states have a regulatory oversight agency that reviews every franchise disclosure document (FDD) for any business trying to offer a franchise for sale within its state. Several of these registration states have different requirements to register the franchise properly with a variety of state specific required disclosures. Moreover, many of these states require an annual registration to ensure the franchise is still in compliance with their requirements year after year.
The state agencies carefully review the FDD to make sure it is amenable with state law and regulations. It is typical for the agency to comment on an FDD and require a franchisor to clarify or even change certain provisions in their FDD. Furthermore, the franchisor is then asked to resubmit the FDD with their comments integrated. Even FDDs that have been previously approved, or clauses that have been approved in other franchise offerings can be questioned and rejected. The entire process can be a grueling one and in some cases in certain states it can take months to gain approval.
Many states will grant approval with a requirement for the franchisor to make a “financial assurance” which is a type of financial guarantee that the franchisor will perform their obligations to the franchisee. This burden usually falls on startup franchisors and franchisors with weak financial statements.
