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Unique Aspects of Franchise Laws

Franchising Laws

The U.S. federal government and the governments of many states have laws that govern franchising. Violating these laws will expose a franchisor to costly litigation, damages, and penalties.

Complying with franchising laws is one aspect of risk minimization, and is essential to the health of your franchise system. To help ensure that you comply with the federal and state franchise laws, you should consult The Johnson Franchise Law Firm before you begin the franchising process.

Changes to the Franchise Rule

In 2007, the U.S. Federal Trade Commission (the “FTC”) issued revised regulations governing franchise disclosure. These rules are found in the U.S. Code of Federal Regulations, 16 C.F.R. Part 436 et seq. We refer to these rules, collectively, as the “FTC Franchise Rule.” We also refer to them, more simply, as the “Franchise Rule.” or “the Rule.” There have been modifications to the FTC Franchise Rule since 2007. More changes are under consideration, and were discussed in a workshop in 2020.

The Franchise Disclosure Requirement

The Franchise Rule requires most franchisors to provide prospective franchisees with information. This process is called “disclosure.” There are some exemptions; i.e., situations where a franchisor is selling a franchise, but where the franchisor does not have to comply with the Franchise Rule. These exemptions include:

  • A minimum payment exemption (where required payments to a franchisor total less than $500 during the first six months of operation)
  • A fractional franchise exemption (where the franchisee’s management already has experience in the business being franchised and the sales of the franchise will be 20% or less of the franchisee’s revenues)
  • A large franchise investment exemption (where the investment in the franchise is at least $1 million, excluding the cost of land and franchisor-provided financing)
  • A large franchisee exemption (where the franchisee is likely to be a particularly sophisticated business operator)

The Franchise Rule specifies the form and content of the disclosures a franchisor must give. The franchisor gives the disclosures in a “Franchise Disclosure Document,” or an “FDD.” The predecessor of the FDD was the “Uniform Franchise Offering Circular,” or the “UFOC.” The Franchise Rule also specifies the timing of delivery of the FDD. The federal Franchise Rule is the law in all jurisdictions in the United States. These jurisdictions include all 50 states, plus parts of the United States that are not states. The most important of the parts that are not states are Washington, D.C., American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands. There are also 16 “Minor Outlying Territories” like Wake Island, Howland Island, and Midway; however, these areas are generally uninhabited or unincorporated, or are otherwise not hotbeds of franchising activity.

The Franchise Disclosure Document

The FDD must disclose literally hundreds of facts about the franchisor, the franchise system, the franchise transaction, and the franchise documents. These facts are consolidated into sections of the FDD called “Items.” The FDD must contain 23 Items, including:

  • A description of the franchisor and any parents, predecessors, and affiliates
  • Profiles of key management and staff personnel, and their business experience
  • The franchisor’s litigation history
  • The franchisor’s bankruptcy history
  • Initial fees required to operate the franchised business
  • Ongoing fees required to operate the franchised business
  • The amount of the franchisee’s initial investment
  • Restrictions on the franchisee’s purchases of goods and services
  • The franchisee’s obligations
  • Financing, if any, that the franchisor may offer prospective franchisees
  • Assistance the franchisor provides
  • The parties’ territorial rights and obligations
  • The intellectual property, like trademarks, patents, and copyrights, associated with the franchise
  • Renewal and termination provisions
  • Information about franchised and company-owned outlets, and terminated
  • Audited financial statements

The FDD must also attach all of the agreements the franchisee will initially sign. These include the franchise agreement and related agreements. The related agreements usually include personal guaranties, confidentiality agreements, covenants not to compete, and development agreements.

At The Johnson Franchise Law Firm, we advise you how to avoid violating the franchise laws. We also draft your franchise documents, update them, and keep your state registration filings current. As franchise attorneys, we advise you on the complex exemptions that may be available to you under the federal Franchise Rule and state franchising laws.

Contact our franchise law firm

At The Johnson Franchise Law Firm, our focus is on the business and laws of franchising. With over 10 years of business experience and 30 years of legal experience, attorney Rick Johnson understands the ins and outs of franchising laws and guides your company away from costly pitfalls. To take your business to the next level through domestic or international franchise development, please contact The Johnson Franchise Law Firm today.

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