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Franchise development is a highly regulated market segment of business and requires careful management to offer franchises appropriately and within the guidelines of each state’s franchise rules and regulations. It is important to first understand why and what the franchise regulations are meant to do and then the process of adhering to franchise registration requirements makes more sense.
The first item to know and understand is that there are two levels of compliance, the first is drawn from the Federal Trade Commission and was derived from FTC Rule 436 which originated in the 1970’s. The FTC Franchise guidelines were meant to protect the franchise buyer from unruly franchise sales people who might tell a buyer anything in order in order to get the sale. The Federal Trade Commission set out to create a franchise marketplace where the buyer had the opportunity to full access to information related to the franchise seller and the business they were investing in and therefore could make a better informed decision related to the franchise purchase. Out of this legislation came the responsibility to create a Franchise Disclosure Document, originally referred to as a Uniform Franchise Offering Circular. In 2008, the guidelines were drastically overhauled to bring the rules up to modern day practices and allow for more current business practices, they were referred to as the NASAA Franchise Registration and Disclosure Guidelines.
The Franchise Disclosure Document is a lengthy document which offers the prospective franchisee with an enormous amount of detail. The document contains 23 items providing information covering a wide range of topics. Item 1 discloses the companies involved in the franchise entity, Affiliates, Parent Companies and other organizations which have something to do with the franchise offering. Item 2 offers information on the management team, bios, background and work experience for each of the management team members is presented. Key elements of the disclosure include whether any of the management team or entities involved in the franchise have filed for bankruptcy or had litigation related to securities or franchising in the past. Item 6 provides the franchise buyer with a clear picture as to what all of the related fees are in the franchise model and Item 7 clearly depicts a low and high range of the investment to open the franchised business – including working capital needed to manage the business to positive cash flow based on the affiliate’s experience. The Franchise Disclosure Document is meant to provide the franchisee with enough information where they could make a qualified decision as to whether they should invest in the franchise.
The FTC guidelines then go into detail related to how the franchise may be presented and what needs to happen to appropriately present the franchise opportunity. First and foremost, the document needs to be drafted according to the specific NASAA Guidelines in order to present the franchise model. Secondly, the FDD must be presented to the buyer at the time of a serious business discussion taking place during the franchise sales process and the buyer may not execute the Franchise Agreement until they have held the disclosure document for a minimum of 14 business days or 16 calendar days.
The Second level of franchise compliance is managed by the States. There are 9 filing or business opportunity states and 14 franchise registration states which require acceptance and approval prior to your being able to offer a franchise in that state for sale. The remaining 27 states follow the FTC guidelines and do not require registration to offer the franchise in that state. With the internet and a wide-reaching marketing platform in today’s franchise market, all ads should contain disclaimers mentioning that some states require registration and that the ad contained does not constitute an offer to sell the franchise and that only the presentation of a Franchise Disclosure Document would be a true offering. The franchise registration process is overseen by different governing bodies for each state, New York is the New York Department of Law, California is the Department of Business Oversight and Maryland is the Office of the Attorney General. The states have unique processes and fees that range from $250 to $750 for annual registrations, again, the focus here is to protect the buyer by reviewing and approving the franchise offering.
The Franchise legal and registration process requires capable legal counsel and strategic oversight to help maintain good standing with the states and FTC. Particularly as a new franchisor, it is easy to sell ahead of yourself from a legal standpoint, by managing this process carefully, you can ensure a long-term growth strategy through solid franchise documentation.
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