In the United States, the establishment and operation of a franchise is regulated by a set of laws and regulations at both the federal and state levels. These legal aspects seek to protect both the franchisor (who gives up its brand and business model) and the franchisee (who invests in and operates the franchise).

Starting a franchise in the United States is a strategic decision that requires not only a solid business acumen, but also a deep understanding of the legal aspects involved. From the outset, it is essential to have the advice of a franchise lawyer who can guide you through every step of the process, ensuring that you comply with all regulations and protecting your interests.

A good attorney will not only help you interpret and comply with federal and state regulations, but will also be essential in reviewing key documents, such as the Franchise Disclosure Document (FDD) and franchise agreement. It is important to note that at Interlink FBC we do not perform immigration regulations or legal services, but we are here to connect you with our network of experts who can assist in these critical aspects.

Below is a broad overview of the legal aspects of franchising in the United States from the perspectives of the franchisee and franchisor:

1. Introduction to Franchising in the United States

A franchise is a business model that has proven to be highly effective for the expansion of brands and businesses. Under this model, the franchisor grants a franchisee the right to operate a business using its trademark, its products or services, and a proven operating system.

This business model allows the franchisor to expand its presence in the market without the need to invest large amounts of capital in new locations. For the franchisee, it represents an opportunity to operate a business with a higher probability of success than if they did it independently, due to the endorsement and recognition of the brand, as well as the ongoing support offered by the franchisor. Read on to discover the legal aspects of franchising in the United States:

2. Legal aspects of franchising for the Franchisor

to. Franchise Disclosure Document (FDD)

The Federal Trade Commission (FTC), through the Federal Franchise Rule, requires the franchisor to provide a Franchise Disclosure Document (FDD) to any potential franchisee. This document is essential to ensure transparency and must be delivered at least 14 days before a contract is signed or any payment is made. The FDD must include the following 23 key items:

  • Information about the franchisor: This encompasses the history of the company, its organizational structure, legal background, and any relevant litigation in which the company has been involved. This section helps franchisees assess the stability and reputation of the franchisor.
  • Startup Costs: Here you break down all the startup costs needed to set up the franchise, which may include franchise fees, equipment costs, startup inventory, lease of premises, and other startup expenses.
  • Obligations of the franchisor and franchisee: This section details the rights and responsibilities of both parties. For the franchisor, this may include the provision of training, ongoing support, and monitoring of compliance with standards. For the franchisee, it includes paying royalties, adhering to operating standards, and participating in marketing programs.
  • Financial statements: This includes detailed financial information about the franchisor, such as its audited financial statements, which is crucial for the franchisee to assess the creditworthiness of the business.
  • Territories and exclusivity: The territorial rights of the franchisee are specified, that is, if it has the exclusivity to operate in a certain geographical area, thus avoiding competition with other franchisees of the same brand.
  • Contract Length and Renewals: This section covers the length of the franchise agreement, the conditions under which it can be renewed, and any costs associated with the renewal.

b. FDD Registration

In some states, in addition to providing the FDD, the franchisor must register the document with state authorities before offering the franchise to potential franchisees. These states have their own franchise laws that may require additional requirements, such as filing affidavits and paying registration fees. It is crucial for the franchisor to familiarize themselves with the specific laws of the state in which they plan to operate, as non-compliance can result in significant penalties.

c. Compliance with Intellectual Property Laws

The franchisor must ensure that its brand, logos, and any other intellectual property assets are properly registered and protected against possible infringement. This includes trademark registration with the United States Patent and Trademark Office (USPTO) and ongoing monitoring to prevent unauthorized use by third parties. Proper intellectual property protection is critical to maintaining brand integrity and value.

d. Franchise Agreement

The franchise agreement is the legal document that formalizes the relationship between the franchisor and the franchisee. It should include:

  • Contract Duration and Renewal: Specifies the initial duration of the agreement and the conditions for its renewal, including any changes to terms or fees.
  • Financial obligations: Describes the royalties that the franchisee must pay to the franchisor, along with other possible fees, such as contributions to a marketing fund or renewal fees.
  • Training and Support: Details the type and amount of training the franchisor will provide to the franchisee, as well as the ongoing support that will be offered to ensure the success of the business.
  • Termination clauses: Defines the conditions under which the contract can be terminated, either by default of one of the parties or by mutual agreement. It may also include penalties for early termination.

and. Compliance with Federal and State Regulations

In addition to complying with regulations imposed by the FTC, franchisor must comply with other federal and state laws that may include labor regulations (such as minimum wage and hour laws), tax regulations, and any other regulations specific to your industry or location. Compliance with these laws is essential to avoid litigation and ensure the continued operation of the business.

3. Legal aspects of franchising for the Franchisee

to. FDD Review

It is critical that the potential franchisee thoroughly review the FDD before proceeding with any investment. Not only does this document offer a clear view of what it means to be part of the franchise, but it also provides critical information about the costs, risks, and obligations that the franchisee will assume.

b. Financial and Legal Due Diligence

Before signing the franchise agreement, the franchisee must carry out a thorough evaluation of their financial and legal situation. This includes ensuring that you have the necessary funds to cover start-up costs and operate the business during the first few months, which can be the most challenging. Additionally, it is essential to review the contract with an attorney to fully understand the terms and conditions, as well as the associated risks.

c. Compliance with the Franchise Agreement

Once the contract is signed, the franchisee must strictly adhere to all stipulated obligations. This includes:

  • Royalty payment: Generally, this is a percentage of gross sales, and must be paid regularly to the franchisor.
  • Compliance with operational standards: The franchisee must operate their business according to the standards set by the franchisor to maintain brand consistency.
  • Participation in training programs: It is vital that the franchisee participates in trainings and uses the ongoing support offered by the franchisor to optimize business operations.

d. Compliance with Local Regulations

In addition to complying with the requirements set by the franchisor, the franchisee must ensure that they comply with all local laws and regulations. This includes obtaining necessary business licenses, complying with zoning regulations, and adhering to health and safety laws that apply to your industry and location.

At Interlink FBC, we recommend that future franchisees carry out a thorough analysis and have expert advice before embarking on a franchise investment. Our team is trained to guide investors through the entire process, from the initial evaluation and business plan creation to the registration of your LLC, ensuring that each step meets the legal requirements and maximizes the potential for success of your business.

Contact us to receive personalized support and ensure that your investment is protected and aligned with your business objectives.

Franchising in the United States

4. Relevant Legislation and Regulations

a. FTC’s Federal Franchise Rule

The FTC’s Federal Franchise Rule sets forth the rules governing franchisors’ disclosure of information to prospective franchisees. This rule is the legal basis for FDD and aims to protect franchisees by ensuring that they receive all the information necessary to make an informed decision. Any violation of this rule can result in severe penalties for the franchisor.

b. Transfer of Franchises Act 1979

The Transfer of Franchise Act of 1979 supplements the Federal Franchise Rule and establishes specific standards for disclosure of information and franchisee protection in the sale of franchises. This law is particularly important in states that do not have their own franchise laws, as it provides an additional legal framework to protect franchisees.

c. State Franchise Laws

In addition to federal regulations, some states have their own legal aspects of franchising that may impose additional requirements for the operation of a franchise. These laws may include the obligation to register the franchise, restrictions on termination of the contract, and additional disclosure requirements. It is essential that both franchisors and franchisees understand and comply with the specific laws of the state in which they will operate the franchise.

5. Other Legal Aspects of Franchising

to. Intellectual Property Protection

The protection of intellectual property is another legal aspect of franchising that you should consider. This point is crucial to maintaining the integrity and value of the franchise. This includes the registration of trademarks, logos, and other intellectual assets, as well as ongoing monitoring to prevent unauthorized use by third parties. A franchisor that fails to adequately protect its intellectual property may face significant challenges in maintaining brand consistency.

b. Labor and Tax Regulations

Both parties to the franchise must comply with applicable labor and tax regulations. This includes complying with laws regarding minimum wage, work hours, and employee benefits, as well as ensuring that all income and expenses are properly reported for tax purposes. Failure to comply with these regulations can result in severe penalties and damage the franchise’s reputation.

c. Dispute Resolution

The franchise agreement should include clear mechanisms for dispute resolution, which may include mediation, arbitration, or litigation. These mechanisms are important for handling any conflicts that may arise between the franchisor and the franchisee, ensuring that they are resolved fairly and efficiently.

6. Sources and References

To delve into the legal requirements of franchising in the United States, it is recommended to consult the following sources:

  • Federal Trade Commission (FTC):
    • Guide for Franchisors
  • United States Patent and Trademark Office (USPTO):
    • Trademark Registration
  • Small Business Administration (SBA):
    • Franchise Information
  • Transfer of Franchises Act 1979:
    • Available in the Code of Federal Regulations (CFR).
  • Franchise Associations:
    • International Franchise Association (IFA)

In addition, it is highly recommended to consult with a franchise attorney to ensure that you comply with all applicable regulations and protect the interests of both the franchisor and the franchisee.

At Interlink FBC we are ready to facilitate the acquisition of your next franchise. Contact us for advice from our network of professionals.