Entrepreneurs looking for a big jump into the business world should look into franchising. Whether you are a restaurant owner, a gym owner, or you run retail stores, becoming a franchisee is a great idea. It allows you to take advantage of the proven business model of an established brand and receive ongoing training and support.
However, before you take that step, you should learn about franchising and its legal ramifications. This article explains the rules and laws surrounding franchising and how they protect all those involved.
Franchise Laws
Federal and state laws combine to make up franchise laws; these are laws regulating franchise registration, offer, and sale. The laws also regulate the legal relationship between those involved, including the franchisor and the franchisee. The essence of the laws is to ensure transparency in the franchising process, protecting and safeguarding franchises from dubious franchisors.
The same federal element that governs other laws with state and federal input governs franchise laws. This element is compliance with the Franchise Rule of the Federal Trade Commission. However, there may be added laws and protections in states, but it depends on the state.
The Franchise Rule
The Federal Trade Commission, an independent US government agency, enforces the Franchise Rule. It is an overarching federal law governing all franchising transactions in the country and falls under the FTC’s jurisdiction.
The FTC regulates the Franchise Rule because it is an agency that works to prevent fraudulent, deceptive, and partial business practices. The rule is about the requirement for a franchisor to give the franchisee a disclosure document before any franchise offer or sale.
The Franchise Disclosure Document
This document composes a comprehensive agreement with detailed information about the franchisor and franchise chances. Information the franchise disclosure document must provide includes the franchisor’s history, how the system operates, and the required initial agreement. It should also include information about other important details related to the franchise, including ongoing royalties and territory restrictions.
Meanwhile, the franchisor must provide the FDD to potential franchisees before entering a legal agreement. More so, the FDD exists to help franchisees decide whether they still want to invest in a franchise.
The FDD Review
According to the Franchise Rule, the franchisor must give potential franchisees the FDD at least 14 calendar days. That is, fourteen days before the franchisees sign any agreement or pay the franchisor any money. Meanwhile, franchisees must review the FDD with their lawyers and financial advisors before deciding – and all within two weeks.
What Happens Upon Violation of The Franchise Rule?
When franchisors fail to uphold the Franchise Rule, the FTC has the right to investigate them. What the FTC classifies as a violation includes failure to provide the disclosure document and provision of incomplete disclosure documents. Also, purposeful or accidental misrepresentation of information in the disclosure documents violates the Franchise Rule.
If, upon investigation, the FTC discovers that the franchisor violated the rule, there will be consequences. Penalties for violating the Franchise Rule include fines from the FTC and private lawsuits from the franchisee.
Conclusion
“The Franchise Rule consists of a combination of federal and state laws with some additional state laws, depending on the state. The Rule exists to regulate all franchise businesses, ensuring fair, transparent, and informed business transactions. Violation of the Rule, whether intentional or accidental, will incur penalties from the FTC, the government agency regulating the laws,” says Attorney Jason W. Power of Franchise.Law. With all this in mind, you are ready to take the next step into the world of franchising.