Top 3 Regulations New Franchisors Should Watch For
When franchisees invest in your concept, they’re often investing a good portion of their life savings. Franchise regulations make sure these investors receive fair treatment from the franchisor – and they comply with the franchisor’s brand standards.
As a new franchisor, it’s crucial to stay up to speed on franchise regulations. Here are three important regulations every franchisor should keep in mind:
- The Franchise Disclosure Document
Under the Franchise Rule, the Federal Trade Commission (FTC) regulates what information franchisors must disclose to candidates, and in what time frame. Much of the Franchise Rule deals with the Franchise Disclosure Document (FDD), in which franchisors must provide 23 points of information about the business opportunity.
The most frequently discussed portion of the FDD is Item 19, or the financial performance representation. Here, franchisors can choose to provide information about their system’s financial performance, but many choose not to. While only 30 to 40 percent of franchisors disclose earnings in their FDD's, it can be beneficial to do so.
The FTC requires that franchisors present a complete and accurate FDD to prospective franchisees at least 14 days prior to a sale. The FDD also determines what information franchisors can discuss with candidates during the franchise sales process. For example, a franchisor can only discuss financial performance figures that appear in Item 19 of the FDD. If the franchisor chooses not to disclose financials, candidates must seek out performance figures from existing franchisees.
- The Franchise Agreement
Franchisors must provide candidates with a franchise agreement at least 14 days prior to a sale. This gives candidates plenty of time to review the agreement and ask questions – and protects franchisors in case of future disagreements.
A franchise agreement lays out all the terms of the franchise sale and ongoing relationship, including:
- Grant of franchise, including terms of termination
- Territory limitations, build-out and grand opening processes
- Fees and required purchases
- Advertising obligations
- Length of agreement and renewal terms
- Support services
- Proprietary, confidential and trade secret information and limitations
- Training programs
- Quality control
- Transfers of ownership
- Defaults, damages and complaints limitations
- Obligations after expiration or termination
- Franchisor’s right of first refusal should the franchisee sell or expire
- Details of franchisor-franchisee legal relationship
- Indemnification covenant
- Non-competition covenant
- Dispute resolution protocol
- Insurance information
- State-Specific Franchise Laws
Requirements for franchise registration, filing and disclosure vary from state to state. Thirteen states require franchisors to register their FDD's, with an accompanying fee.
Here are the states where franchisors must register their FDD's before selling any franchises:
- New York
- North Dakota
- Rhode Island
Regulations surrounding contract termination, preferred supplier networks, and franchisee associations also differ from state to state. Some states have different definitions of what constitutes a franchise, making it easy for companies to “trigger” franchise regulations unintentionally. Others even require franchisors to submit franchise advertising material for approval prior to use.
Franchisors must abide by all federal and state franchise requirements, so take the time to familiarize yourself with the franchise regulations in each state you want to enter. A franchise attorney or franchise advisor can help you research regulations and remain compliant.
For help navigating franchise regulations during the sales process and beyond, turn to Winmark Franchise Partners. With 30 years of franchising experience and more than 800 franchise owners representing more than 1,200 locations for five brands, Winmark Franchise Partners can help grow your brand through sound strategy and expert franchising advice.
For more information, contact us here or at (844) 452-4600.