Understanding Franchise Laws: Navigating Rules and Regulations for Investors
For a prospective franchisee, entering the franchise system can sometimes seem like getting caught in a web of paperwork and legal jargon. From pre-sale disclosure obligations to obligatory franchise registration and more, franchise rules and regulations may seem overwhelming, and staying on top of applicable state franchise laws and federal relationship laws can appear daunting at first.
First Things First, What is a Franchise Law?
A franchise law includes federal and state regulations governing the relationship between franchisors and franchisees. It ensures transparency and protects both parties in franchise agreements.
Why do these franchise laws and regulations exist?
Those federal and state laws protect future franchisees and the franchise itself, though, and they help ensure that the sale of franchises doesn’t involve deceptive trade practices and allow the new owner to enter into a franchise relationship with confidence.
At both the state and federal levels, franchise laws and regulations mean they’re getting access to business opportunities without dealing with predatory tactics. They can operate a franchised business effectively, knowing their business entity complies with enacted franchise relationship laws. The areas they cover are easy to understand with some research — you don’t need to be a franchise lawyer to recognize their value.
Second, How Are Franchises Regulated?
Franchise law is multilayered, and it falls under both federal law and state law. While federal franchise law sets the basic and essential rules of franchise transactions, including selling franchises and the legal relationship between potential franchisees and the franchise business they work with, state franchise law plays an equally important role in helping to provide prospective franchisees with critical protections during the franchise sale and beyond.
At the federal level, the Federal Trade Commission regulates the franchising industry through the Federal Franchise Rule, also called the FTC Franchise Rule. Application of the Federal Franchise Rule is contingent on the business relationship between two parties meeting specific criteria: Permission for the franchisee to use the franchisor’s trademark, service mark, or other commercial symbols; franchise direction over the way the prospective franchisee engages in business; and a required payment or fee from franchisee to franchisor. When these three conditions are met, franchise laws like the FTC Franchise Rule come into play. The FTC also regulates foreign franchisors through business opportunity laws.
How Can I Learn More About the Franchise That Interests Me?
The FTC Franchise Rule is one of the primary franchise disclosure laws, and it lays out the requirements and enforcement means associated with the franchise disclosure document (FDD) the franchise entity must provide to potential franchisees before the two enter into a franchise agreement.
That makes this federal law one of the most impactful franchise laws in existence, and it helps make the Federal Trade Commission and the federal government a key advocate for the franchise owner and a considerable influence on franchise relationships in general.
The franchise disclosure document acts as a blueprint for the business. It is designed to give the future franchise owner a complete understanding of what to expect when they enter into an ongoing franchise relationship with the franchise. The document must meet all applicable federal and state laws and regulations for franchise and business opportunity laws.
It must include fundamental information about the brand, such as franchise sales expectations, whether other franchisees can operate within a specific territory, projected gross income, intellectual property concerns, and what the franchisee pays in franchise fee requirements and royalties. Per federal franchise laws, franchise disclosure documents must be available to the future franchise owner at least two weeks before signing a franchise agreement.
State franchise laws and regulations vary, and each state has specific rules regarding a franchisor’s disclosure obligations. Some states, like California, are franchise registration states. Registration states compel franchisors who hold a registered trademark and operate within the state to comply with state franchise registration laws and have their own registration requirements, including updating and renewing their FDD annually.
Some registration states, like South Carolina, also extend the registration requirements to franchises that don’t have a federally registered trademark. Other states, like South Dakota, are known as filing states and have different disclosure requirements. State franchise laws don’t mandate FDD registration in these cases, but they require franchise filing for franchisors looking to sell franchises within a filing state.
You can visit here for a full government-built guide in-depth look.
What’s Involved in Signing With a Franchise?
A well-defined and compliant FDD safeguards someone interested in signing with a brand. It can help them along the path to signing Federal franchising law, state law, and the Franchise Rule also cover franchise agreements between future franchisees and franchisors operating within the U.S. and can be invaluable tools to make sure everyone involved enters into the franchise agreement with open eyes and a complete grasp of what’s involved.
When it comes time to sign, the franchise must comply with all appropriate laws and regulations that govern the sale of franchises and provide the new franchise owner with clear and specific documentation without grey areas or obscure language.
Obligations must be covered in detail, and it needs to provide prospective franchisees with any expectations for all parties involved in the sale. The relationship between the owner and the franchise should be part of the agreement, and any questions the potential owner might have must be addressed before the final signing and commitment.
It’s a legal process refined over time and uses experience and franchise laws to give the business and the individuals within it solid protection.
Become Part of a Visionary Franchise Opportunity as an Owner with Hotshots Sports Bar and Grill!
Federal and state franchise laws were developed to help new owners focus on expanding their customer base and the brand, becoming their own boss, and building wealth while impacting the industry. And that’s how we operate at Hotshots Sports Bar and Grill franchise.
We’ve developed a franchise approach that gives our owners the tools for growth and places them in a business model designed for flexibility and innovation in an exciting and dynamic industry. Find out more today, and get your start with a brand centered on owner advancement!
