Once you have prepared your Franchise Disclosure Document (FDD), there is another important step before you begin offering your franchise – compliance training. Franchise rules are complex and those who will be marketing and selling your franchise can easily run afoul of laws resulting in significant liability. Getting training for yourself, relevant staff and sales personnel is the best way to ensure compliance with franchise sales law.
Before a franchisor can offer or sell franchises, it must comply with various federal and state laws and regulations. These include:
- Federal Trade Commission Franchise Rule (the “FTC Rule”). The FTC Rule requires that the FDD be shared with prospective franchisees at least 14 days before an agreement is signed or any payment of money is made to the franchisor.
- State franchise sales laws. Some states have additional requirements to protect franchisees. In “franchise registration” states, franchisors must register their FDD prior to offering a franchise within that state. In “franchise filing” states, a notice must be filed with the state regulator before selling a franchise. You must take great care not to advertise, make offers to sell, or make actual sales, in any state unless you have complied with these rules. Consult your franchise attorney regarding what you must do to comply.
- Delivery of the FDD. As discussed previously [LINK to be added], when you give a prospect the FDD, you must get a signed receipt. This starts the clock running on the 14-day requirement under the FTC Rule. However, some states have a different rule regarding timing and if your sale implicates one or more of those rules, you must comply with all of them. There are also specific requirements which relate to the format in which you deliver the FDD.
- Sales personnel and brokers. In some states, you are required to file a Franchise Seller Disclosure Form for each person who will be involved in the sale of franchises. Third-party brokers may need to be separately registered.
- Updating FDDs. This issue will be discussed in a separate post, but it should be noted that there are rules governing updates and material changes to FDDs.
- Advertising for prospective franchisees. Prior to advertising the franchise, you must comply with the laws of the state in which you will be selling. Some states require you register in the state and file a copy of all proposed advertising prior to using the advertising. Other rules may also apply.
- Prohibited sales practices. Certain conduct is considered unlawful under the FTC Rule, including misrepresentations or claims that contradict information required to be disclosed. Some states also prohibit specific practices in the offer and sale of franchises.
Prior to finalizing a sale, the franchisor’s “franchise compliance officer” or attorney should review all documents before closing to confirm that all required information is included and accurate. Assuming the documents are in order, schedule a closing that complies with the FTC Rule and any applicable state registration rules regarding timing and disclosures. At the closing, there are best practices for executing the franchise agreement and other related agreements, including a territorial assignment, a confidentiality, non-use and non-competition agreement, an electronic funds transfer authorization, a guarantee and a franchisee compliance certification.
Franchise rules are highly specific and as such it is essential to have the assistance of an experienced franchise attorney. She can educate you and your representatives on how to comply with the various laws until you are comfortable with moving forward on your own. If you are considering franchising your business, contact Lusthaus Law for a consultation.
