Frequently Asked Questions About Franchise Law
- What is franchising?
- What kinds of businesses can be franchised?
- What is a Franchise Disclosure Document?
- What other kinds of agreements are commonly involved in franchising?
- Who regulates franchising?
- What are the penalties for violating franchise laws?
Franchising is a way of expanding a business through the distribution of more of the same business throughout an area. This is an extremely adaptable method of distributing products and services, while potentially increasing revenue drastically. Franchising allows for rapid expansion of a business, but spreads the risks and costs of expansion. A franchisor typically provides the franchisee with training and support for setting up and running a business that uses the franchisor’s business system and trademark or service mark.
Nearly any type of business can be franchised – whether selling products or services, at retail or wholesale, from a storefront or from home, or anything in between. However, just because franchising may seem appropriate for your business does not mean that your business is right for franchising.
The Franchise Disclosure Document (FDD) is a disclosure document that is required by the Federal Trade Commission (FTC) in due diligence of the franchising of the business. All franchisors are required to provide this document, which provides prospective franchisees a fair opportunity for studying the investment before buying. The FDD is given to prospective franchisees by the franchisor once the franchisor is satisfied that the prospect is qualified (at least financially) to purchase the franchise. The FDD contains a listing of all current (and recently departed) franchisees. This is essential because the prospect can contact as many franchisees as desired to get their perspectives on the franchise and the franchisor’s performance.
Every franchise involves a franchise agreement (sometimes called a “license agreement”). A franchisee may also be required to sign additional contracts, such as a confidentiality agreement, a noncompete agreement, a software license agreement, a power of attorney, and other contracts. Sometimes, these kinds of provisions are all included in the franchise agreement. The owners of the franchise entity may also have to personally guarantee in writing certain aspects of the franchise’s performance.
The U.S. Federal Trade Commission (FTC) regulates franchising. Also, a variety of state agencies are involved in regulation in that particular state. The FTC Franchise Rule applies everywhere in the United States, but a state’s franchise laws usually apply only if the offer or sale of a franchise is made in the state, the franchised business will be located in the state, or the franchisee is a resident of the state.
Violations of franchise laws can result in a wide variety of penalties, including large monetary fines, permanent bans on the individual’s or business’s involvement in franchising, asset freezing, monetary damages for victims of the violations and even potentially jail time. State franchise law violations are most often treated either as a fraudulent and deceptive trade practice, a misdemeanor, or a felony.