Franchising your business can be one of the most straightforward and cost-effective ways to expand. But becoming a franchise still requires navigating a complex and ever-changing legal landscape.<\/p>\n\n\n\n
On top of federal laws such as the FTC Franchise Rule, you may need to comply with supplementary state-specific regulations that make compliance even more of a minefield.<\/p>\n\n\n\n
So, what are the legal requirements for franchising your business in the US? And are there any non-mandatory legal tasks that can benefit franchisors? I\u2019ll answer those questions and more in this in-depth guide.<\/p>\n\n\n\n
Franchising your business<\/a> isn\u2019t rocket science, but there are still quite a few hurdles you\u2019ll have to clear before you can start selling franchise agreements. If you want to franchise your business in the USA, you\u2019ll need to meet the following legal requirements:<\/p>\n\n\n\n Under the Federal Trade Commission (FTC) Franchise Rule<\/a>, all franchisors must provide prospective franchisees with a Franchise Disclosure Document<\/a> at least 14 days before signing the Franchise Agreement (FA)<\/a>. The FDD provides franchisees with crucial information regarding the franchise and their investment that helps them decide whether or not to buy the franchise.<\/p>\n\n\n\n The FDD also protects franchisors from potential disputes and litigations. For example, the document contains details on your franchisee\u2019s obligations and rights, such as how they can use your brand and trademarks.<\/p>\n\n\n\n Franchise Disclosure Documents are beneficial to both parties, but they are not optional. You must prepare an FDD to comply with federal laws. Moreover, the document must include 23 mandatory items, which include:<\/p>\n\n\n\n Remember: You cannot accept any payments from your prospective franchisee for at least 14 days after providing them with your FDD. You\u2019ll also need to update your FDD at least once a year.<\/p>\n\n\n\n If you want to maximize the chances of success for your franchising model, you need to have powerful trademarks and branding that people instantly associate with your franchise. Just as importantly, you need to legally protect your brand name, trademarks, and all other intellectual property.<\/p>\n\n\n\n Most franchising agreements allow the franchisee to use the franchisor\u2019s trademarks. By protecting your intellectual property, you ensure that only authorized franchisees can use your trademarks in the way that you specify. Without legal protection, you may have little recourse if a franchisee misuses your trademarks.<\/p>\n\n\n\n Think of it this way: If you leave your trademarks unprotected, a competitor could copy your entire business model, and there wouldn\u2019t be much you could do about it.<\/p>\n\n\n\n I suggest registering your trademarks with the U.S. Patent and Trademark Office<\/a> as early in the franchising process as possible. After all, not all trademarks are legally protectable, and the last thing you want is to have to rebrand your franchise once you\u2019re established.<\/p>\n\n\n\n It is important to choose your business structure carefully when franchising. Since you\u2019ll be rapidly expanding your business and earning new income streams, you may need to change your entity type.<\/p>\n\n\n\n If you currently operate your business as a sole proprietorship or an LLC, I suggest changing your structure to a corporation (S-Corp or C-Corp). This gives you more legal protections and reduces your personal liabilities if the company goes bankrupt.<\/p>\n\n\n\n For example, if you operate as an LLC and your franchise is sued for breach of contract, a court could potentially \u201cpierce the corporate veil\u201d and go after your personal assets (your car, house, or savings).<\/p>\n\n\n\n Creating a separate entity for your franchising company provides additional legal protections for your brand and protects your personal assets in the case of lawsuits.<\/p>\n\n\n\n Depending on your growth aspirations, you can also set up an IP holding company to ensure your brand assets cannot be seized if your franchising company fails or faces litigation.<\/p>\n\n\n\n I should note that changing from a sole proprietorship to a corporate structure comes with a few downsides. For example, you\u2019ll need to cover the legal and administrative fees of establishing the business.<\/p>\n\n\n\n Establishing an entity for your franchise can be complex, and even tiny mistakes can be costly<\/a> and time-consuming. I highly recommend partnering with a franchising attorney to help you navigate the process.\u00a0<\/p>\n\n\n\n No matter where you establish your franchise in the US, you must comply with the FTC Franchise Rule, which includes providing your prospective franchisees with an FDD 14 days before signing the FA. However, some states have established supplementary regulations for franchises.<\/p>\n\n\n\n In what are known as franchise registration states, all franchisors must register their franchise and FDDs with a regulatory body before they can start selling franchises. Some states also require franchisors to comply with additional regulations that protect their franchisees.<\/p>\n\n\n\n For example, in California, franchisors must provide written notice with a valid reason before terminating a contract or rejecting a term renewal under the Franchise Relations Act (CFRA)<\/a>. <\/p>\n\n\n\n I suggest familiarizing yourself with the various supplementary laws imposed on franchisors in registration and filing states. It may impact where you decide to establish your franchise or search for expansion opportunities.<\/p>\n\n\n\n The Franchise Agreement is the legally binding document that defines the relationship, responsibilities, and expectations of the franchisor and franchisee.<\/p>\n\n\n\n While the FDD contains pre-sales information<\/a> to help franchisees make a decision on whether or not to invest, the FA is a legally enforceable contract that governs the rights, fees, and operational requirements of your franchisees. So, you really can\u2019t afford to rush or cut corners when it comes to drafting this essential document.<\/p>\n\n\n\n Here are some of the issues that an FA usually addresses:<\/p>\n\n\n\n Ideally, your FA needs to be clear, concise, and fair. Remember, this contract also spells out your legal obligations to your franchisee. To avoid costly mistakes, hire a franchise attorney or get in touch with us at Franzy<\/a>.<\/p>\n\n\n\n Being prepared for unexpected challenges is a crucial aspect of successful franchising. One of the best ways to prepare your business for worst-case scenarios is by taking out insurance policies.<\/p>\n\n\n\n Depending on your location, you may be legally required to invest in certain insurance policies, such as workers\u2019 compensation insurance and general liability insurance. However, after seeing all sorts of different claims brought against franchisors over the years, I strongly suggest purchasing insurance to cover any and all potential business vulnerabilities.<\/p>\n\n\n\n Here\u2019s what I recommend at a minimum:<\/p>\n\n\n\n Depending on your location and industry, you\u2019ll need to obtain various permits and licenses to legally franchise your business. <\/p>\n\n\n\n Most states require franchisors to have a business license to operate in a certain jurisdiction.<\/p>\n\n\n\n If your franchise has employees, you\u2019ll need to register for Employer Identification Numbers (EINs) with the IRS<\/a>. You also need an EIN for your business if you change your business into a corporate entity.<\/p>\n\n\n\n In some states, you\u2019ll need specific permits to legally collect sales tax on certain goods. For example, companies in Nevada\u2019s<\/a> hospitality sector must obtain a gaming license<\/a> from the Gaming Control Board if there are any games or slot machines on their property.<\/p>\n\n\n\n You\u2019ll also need to pay attention to industry-specific<\/a> licenses and permits that may apply to your franchise. For example, fast food franchisors<\/a> will likely need a permit from the relevant State Health Department. Similarly, if you operate in the health and wellbeing sector, you may require a permit from the local Department of Health.<\/p>\n\n\n\n You can find out which permits and licenses apply to you by checking state and local government websites, most of which have a business portal. You can also find information on mandatory state, county, and city business licenses and permits using the government\u2019s Small Business Administration<\/a> website. For more advice on what permits and licenses your business may need, schedule a free consultation<\/a> with us at Franzy.<\/p>\n\n\n\n I know I may sound like a broken record, but I really can\u2019t stress enough the importance of working with an attorney when starting a franchise. Hiring a franchise attorney may not be a legal requirement, but it\u2019s a very smart idea.<\/p>\n\n\n\n As you can probably tell from what we\u2019ve discussed so far, there are plenty of legal hurdles to overcome when franchising your business. Plus, staying on top of your legal obligations can be just as challenging.<\/p>\n\n\n\n Delays, mistakes, and even a lack of clarity in your wording can all be extremely costly to your budding franchise business. If you want to minimize the risk of these costly mistakes and setbacks arising, your best bet is to work with an industry expert who understands the complex legal landscape of franchising.<\/p>\n\n\n Sign up for our free email newsletter. It’s a 5-minute read once a week to help you level up on the franchising industry.<\/p>\n\n\n\nPrepare a Franchise Disclosure Document<\/h3>\n\n\n\n
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Protect Your Intellectual Property and Trademarks<\/h3>\n\n\n\n
Choose a Business Entity Type That Serves Your Needs<\/h3>\n\n\n\n
Register Your Franchise with the State (If Required)<\/h3>\n\n\n\n
Prepare the Franchise Agreement<\/h3>\n\n\n\n
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Secure Necessary Insurance Policies<\/h3>\n\n\n\n
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Obtain Necessary Permits or Licenses<\/h3>\n\n\n\n
Work with a Franchise Attorney <\/h3>\n\n\n\n
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