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Franchising in the United States is heavily regulated, and existing and prospective businesses must abide by a number of laws. For success in business, it is essential that franchisors familiarize themselves with these laws and seek legal advice from attorneys to ensure that they and all branches of their brand are fully compliant.
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1. Is your business a franchise?
Your business will be considered a franchise in the eyes of the law if it allows other businesses to bear its trademarked name and to supply its goods and services while paying it fees or royalties for the privilege of doing so.
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2. Do you specify the way in which your branches operate?
Franchisors are legally obligated to inform prospective franchisees of their rights and requirements by way of a Franchise Disclosure Document (FDD) prior to becoming a franchisee. Many states require a state agency review to be conducted on the FDD prior to sales activities beginning.
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3. What rights do franchisees have?
Franchisees can bring legal action against a franchisor in cases where the franchisor has violated state registration or disclosure laws, or if the franchisor has made misleading financial performance representations that harmed the franchisee's business venture. They can claim for rescission of the franchise agreement or for actual damages incurred, including their attorney fees and expenses.
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4. What information must be included in a FDD?
FDDs are made up of 23 categories, which include the history of the franchisor; fees that are associated with the running of the franchised business; the products or services to be delivered; a list of trademarks, designs and patents; and the territory in which the franchisee will operate. The FDD must also include an exit strategy and a section covering dispute resolution.
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5. How often must an FDD be updated?
An FDD must be updated every year to include updated and audited financial information. It must also be updated at any point that material changes are made. These include any bankruptcy filings or pending litigation that must be included in Item 22 at the end of each fiscal quarter.
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6. What are the consequences of violating franchise laws?
If a franchisor is found guilty of violating franchise laws, they can be barred from conducting business in particular states and may be required to compensate aggrieved parties. Some violations, such as fraud or misrepresentation, will be treated as crimes with individual liability assigned to franchise owners, directors or representatives acting in an official capacity for the business.
There are a multitude of laws that govern the operation of franchise businesses in the United States, and they often vary by state. It is highly advisable that entrepreneurs wishing to franchise their business employ the services of a franchise attorney and seek the advice and support of a relevant trade association prior to advertising their business to ensure that they can comply with all applicable laws and regulations.
