Understanding franchise law starts with the understanding of the term franchise within the realm of business. Franchise business is defined, as a method a company uses to distribute its products or services through retail outlets owned by independent, third party operators. The independent operator does business using the marketing methods, trademarked goods and services and the goodwill and name recognition developed by the company.
For all of this, the independent operator does pay an initial fee and royalties to the owner of the franchise.
Franchise law was primarily established in 1979. The FTC Franchise Rule requires that covered franchisors supply a full disclosure of the information a prospective franchisee needs in order to make a rational decision about whether or not to invest. This disclosure must take place at the first personal contact where the subject of buying a franchise is discussed and at least 10 days prior to signing any contract with the franchisee or accepting any money.
In regards to state laws, the FTC doesn’t require franchisor or business opportunity sellers to register with it or any other government agency. However, many states do have registration rules requiring franchise sellers and registration. Some state laws are more stringent than others and most have adopted the FDD guidelines for their disclosure requirements.
In receiving your disclosure statement from the franchiser, you will obtain 1) a written disclosure statement or offering circular that sets forth certain information about the business to be franchised, and 2) proposed franchise agreement or contract.
A third attachment, the ‘earnings-claim’ statement may or may not be furnished by the franchiser. All documentation, including the earnings-claim statement is contained in a single form that is referred to as the “Uniform Franchise Offering Circular” (UFOC).
By law, this disclosure has to be written clearly and concisely and in narrative form. You should not need an attorney to interpret it.
Despite these requirements, this does not mean the offering has the approval or recommendation of the government or that the information is complete or accurate. The government does not weigh the risk factors of a franchise. It is on the shoulders of the buyer to confirm and verify the contents of the information.
Once a decision is made to purchase rights to a franchise, a franchise agreement is signed. This agreement legally binds both parties to the obligations and rights laid out in it. One should have an attorney review the agreement before signing as most agreements are one-sided and favor the franchiser. The agreement will outline provisions in great detail such as the obligations of the franchiser and franchisee, training and operational support, territory and exclusivity, renewal rights, investment cost, selling or transferring of the franchise, advertising policies, franchisee termination issues, settlements of disputes, operating practices and attorney fees.
Each agreement will be unique to each franchise and could depend on the type of business, which is involved.
Consulting an attorney is most advisable before purchasing a franchise as the laws can change. Recently, in 2007, under a Federal Trade Commission rule, all franchisors in the U.S. are now required to make disclosures to prospective franchisees using the FTC’s Franchise Disclosure Document (FDD) format. This rule replaced the FTC’s 1979 trade regulation rule on franchising.
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