Are You Ready To Franchise Your Business? Are You Sure It Is Not Already A Franchise?
Here’s what you should expect when starting a franchise business.
The International Franchise Association (IFA), the leading advocacy group for franchisors in the nation, estimates that the majority of goods and services sold in the United States at retail are sold through franchises. And no wonder!
The model, which started in the 1950s, allows the franchise system owner (“franchisor”) to standardize its operation without actually owning or running the retail outlets. In addition, it furnishes the successful franchise system with a steady and growing stream of income and facilitates the ability of dedicated people – the franchisees.
As a result, Franchisors have the opportunity to be part of an established system yet retain the opportunity to be entrepreneurs.
What is a franchise?
A “franchise” is defined by the Federal Trade Commission (which has jurisdiction over all the states) as a commercial relationship in which:
- The franchisee has the right to operate under or in association with the franchisor’s trademark.
- The franchisor has authority to exert significant control over the franchisee’s method of operation or provide significant assistance. This does not include hiring, firing or directing the franchisee’s employees, unless the franchisor is a “joint employer.”
- The franchisee makes or agrees to make a payment to obtain or start a franchise to the franchisor or its affiliate (known as the “franchise fee”). The purchase of goods at a bona fide wholesale price are not franchise fees.
What to Expect when Starting a Franchise
Before entering into a franchise agreement, the franchisor is required to provide to the prospective franchisee in advance of any relationship a Franchise Disclosure Document (“FDD”).
What does the Franchise Disclosure Document include?
The FDD contains over twenty categories of information about the franchise system, and its history, its officers, litigation, the various fees to be paid to the franchisor and others, supply requirements, the estimated expenses of starting the franchise location, and the franchisor’s balance sheet.
In addition, the Franchise Disclosure Document (FDD) will include the requirements of all agreements the franchisee must sign, starting with the Franchise Agreement itself.
Does the FTC review the Franchise Disclosure Document?
No, the FTC does not review the FDD nor even receive it. However, a minority of states have their own franchise disclosure laws that add small elements to the FTC requirements.
Does Connecticut have a Franchise Disclosure Law?
Connecticut does not have a Franchise Disclosure Law. However, the Connecticut Franchise Act is a law that regulates terminations and non-renewals of franchise agreements in the state.
What states have an FDD Law?
Currently, the following states have franchisor requirements in order to do business in the state:
- New York
- North Dakota
- Rhode Island
If you are in one the states listed above and plan to open a franchise business, you must submit an FDD to your state for review and approval. In addition, you will be required to renew your franchise registration each year.
What Happens After the FDD
Once the initial FDD for a start-up franchisor is drafted, the process each year is smooth and almost routine. Changes in FDDs for new franchisees each year will be made to the dollar figures, new developments, and to certain requirements. However, these changes are made at the franchisors request.
To the extent the system is reasonably fair to both the franchisor and the franchisees, it will grow through sales of new franchises. Some systems have a small number of franchises, while McDonalds and Subway have tens of thousands.
Today, franchise operations are in almost every conceivable area of commerce, from food to maid service to tax services to hundreds more.
Questions to Ask Before Starting a Franchise
There are many business questions to be asked and answered before making the commitment and investment to start a franchise system.
It is important not to franchise too early but also important not to miss the competitive opportunity when ready. In addition, it is also important to seek legal counsel prior to starting a franchise system.
If you have an existing business, you want to make sure that your business is not already a franchise by accident. If this is the case and you are unaware, then you will be presented with very significant legal concerns.
Additionally, legal console can suggest and help negotiate changes to the franchise agreement on your behalf.
Franchise Attorney in New Haven CT
Before purchasing a franchise, allow yourself the benefit of understanding what you can expect when you start a Franchise Business. Garcia & Milas Law Firm located in New Haven, CT has decades of experience representing franchisors and franchisees nationwide.
We help our clients evaluate whether a franchise system is a beneficial way to develop their business, assist them in structuring franchise business programs and entities, prepare and register FDDs, and advise on legal compliance matters.
Our franchise attorneys are available to help navigate this process with you. To learn more about the franchise services we provide, visit our Franchise and Distribution Law page.
By Allan P. Hillman, Esq.
Allan Hillman is a business and litigation attorney. He has practiced and has taught franchise, antitrust, non-compete, and trademark law to business clients, lawyers and judges. He has many years of experience in these areas, has Chaired to the Connecticut Bar Association Franchise, Dealer & Distribution Law Committee, and served on the American Bar Association Governing Committee for its Forum on Franchising.
This publication is for general information purposes only and is not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.