lawyer

#Law You Can Use: Franchising your business

By Ohio State Bar Association

Posted: 07/19/15, 6:19 PM EDT | Updated: 2 hrs ago

Question: A number of people have asked if I am offering franchises for my existing business. Can I just start selling franchise licenses to those who are interested?

Answer: The sale of franchises (and related business opportunity plans) is regulated in the United States. The Federal Trade Commission has a rule (FTC Rule) that requires franchise sellers to provide detailed written disclosures to prospective franchisees and 15 states also have franchise disclosure laws, 14 with a registration requirement. The registration process typically involves submitting a uniform application, a filing fee and a Franchise Disclosure Document to a state franchise examiner. In addition, the FTC and 26 states, including Ohio, have business opportunity plan disclosure laws.

I was only planning to sell licenses—not a franchise or a business opportunity plan. Is that allowed?

To determine if a “license” is really a regulated franchise or business opportunity requires a legal analysis. Franchise relationships are determined by how each law defines the components of your “license” and the opportunity you are offering. You may believe you are offering “only a license,” but a legal analysis may show that it is really a regulated franchise or business opportunity.

Advertisement

How can I tell if my offering would be regulated?

Numerous state and federal laws and regulations determine this, but, roughly speaking, if you 1) charge an upfront fee, 2) offer any type of assistance (such as educational, marketing, customers/accounts or equipment/inventory acquisition) in helping someone start a new business, and 3) simply tell interested persons that there is a market for the business opportunity or that they must operate under your trademark or that they must follow a defined marketing plan, then your offering likely would be considered a regulated franchise or business opportunity plan.

If it is regulated, what do I have to do to stay legal?

To properly sell franchises in the U.S. you must prepare and provide to potential buyers an FDD, which covers 23 categories of information about you (the franchisor). Also, as mentioned earlier, the FDD must be registered in certain states. The FDD must include all agreements that a franchise buyer will be required to sign, as well as your company’s financial statements (audited after the first year), a list of existing and former franchisees, and a list of state franchise administrators.

Once I have an FDD, am I ready to go?

If you intend to offer franchises for sale in California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington or Wisconsin, then you also must register the FDD and pay a filing fee. You also must perform at least an annual update of the information in the FDD. It is also wise, although not required, to register your trademark on the U.S. Patent and Trademark Office’s Principal Register. This is an important protection for your brand and for your franchisees. The FDD requires a disclosure about trademark registration and the rights franchisees will gain concerning the use of the trademark. If you have not registered the primary trademark with U.S. Patent and Trademark Office, you must disclose that fact.

What else do I have to worry about?

There are strict state and federal rules about when you, as a franchise-seller, must provide the FDD to potential buyers as well as restrictions on how quickly you can accept the initial franchise payment and the executed franchise agreement from the buyer. In addition, from an operations standpoint, you must be prepared to deliver what you promise, such as operations manuals, training, opening assistance, marketing support and any other promised services.

What might happen if I ignore the laws applying to franchises, or don’t comply with some requirement?

If you were to violate the FTC Rule, then the FTC could bring an enforcement action against you, asking the court to order you to comply with the law. Depending on the state law that may apply, your franchise transaction could be rescinded and you could be required to return all money to the franchise-buyer. In addition, statutory penalties could be imposed and you may also have to pay the buyer’s attorney fees. Some states have criminal penalties and permit the state’s attorney general to bring an action, including a class action if the particular violations are widespread.

This “Law You Can Use” consumer legal information column was provided by the Ohio State Bar Association. It was prepared by Columbus attorney James A. Meaney, who focuses his practice on franchise law. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.