For starters, some franchise laws are federal and others can vary from state to state, so make sure you’re abiding by your local requirements – especially if a new hopeful franchisee approaches you from out of state. Laws can include subtleties like “business opportunities” that might technically be considered franchising (even though you don’t consider your company a franchise), and ignorance of the law is no excuse, so it’s best to have a pro on your side.
The Federal Trade Commission (FTC) governs all franchising in the United States, and the laws apply to every franchise. State laws apply when the sale offer is made in a particular state, if the franchised company will operate in that state or if the franchisee is a resident of a certain state.
The federal definition of a franchise includes three aspects: trademark, significant control or assistance, and required payment. If you have all three components, then the FTC considers your business a franchise.
With a trademark, franchisees have the right to distribute services/goods that boast the franchise’s trademark. It also might be called a logo, service mark or any other type of commercial marking.
Having “significant control or assistance” is the most complex element. A franchisor has a lot of control over the franchisee’s operations. Many aspects may fall under this specification and can include design requirements, production strategies, site approval, training programs, key accounting practices and more.
Finally, there’s the all-important required payment. A franchisee must pay the franchise owner (or his/her affiliate) a minimum of $500 within a six-month window of the business’ opening. Of course, franchises can dictate what that sum really is. The fee must include any training costs, service payments, royalties and profits from product sales.
A State of Mind
Always check with a franchise lawyer in your state before moving forward with any agreement. The laws can vary greatly from state to state, but many overlap. For example, in at least 12 states you’re required to have a marketing plan and you must pay a required fee. Many states require a community of interest and a trademark license. In states with truly unique laws, including Arkansas, Delaware and Florida, you’ll be better off with legal counsel.
At both the federal and state levels, laws can be broken down into three areas: disclosure, registration and relationship. Disclosure laws address items such as prohibited sales practices, cooling-off time frames and any pre-sale disclosures. Registration laws cover registration, advertising and salespeople. Relationship laws oversee termination, nonrenewal of a franchise and equal treatment.
No matter what side of the agreement you’re on, having an attorney in your corner can help. Consult with a trusted, local franchise attorney for all your business’ needs, from bringing on a new franchisee to making sure all state requirements are being met.