Legal Information for Entrepreneurs
Basics of Franchise Law
Franchise law is very different from other areas of business law. For that reason, franchise lawyers are often in high demand. Learn the basics of franchise law by reading this article.
Franchisors know that many young entrepreneurs are willing to do just about anything to own a small business.
Left unchecked, some may be tempted to use that information to lock eager franchisees into unfair contracts. Fortunately, franchisees have a friend who is looking out for them and their interests: Franchise law.
Franchise law is based on federal regulations designed to protect both franchisees and franchisors throughout the franchising process.
Not surprisingly, it can get complicated and may require the services of an attorney with franchise experience. Even so, the Federal Trade Commission (FTC) publishes rules outlining the parameters of franchise law.
These rules relate to the ""advertising, offering, licensing, contracting, sale or other promotion" of franchises and include the following:
Franchisors are required to provide potential franchisees with a Uniform Franchise Circular Offering (UFCO) and other disclosures at the time of the first face-to-face meeting or 10 days prior to purchasing or contract signing.
Franchisees base much of their franchise purchasing decision on the franchise's ability to turn a profit. As a result, franchisors tend to make a lot of claims about earnings when they are trying to sell a franchise. Franchise law dictates that all earnings claims (historical or forecasted) must be reasonable and must be supported with disclosures that accompany the other required disclosures.
More than anything else, this rule requires franchisors to maintain truth in advertising. Franchisor ads that make earnings claims must also include the number and percentage of existing franchises that have actually achieved the advertised results, and must caution potential franchisees that they may - or may not - achieve similar results.
When it comes time to finalize the deal, the FTC wants to make sure that franchisees aren't met with any surprises. Franchisees must be given a copy of the standard franchise agreement when they receive the other standard disclosures. They must also be given a final copy of their franchise agreement at least 5 days prior to the closing.
If the deal falls through, your initial investment is protected, at least to the extent that it is protected in the disclosures you received at the beginning of your relationship. Fanchisors are required to refund deposits and upfront investments as described in the disclosure documentation.
Franchisors can (and will) provide no shortage of promotional literature, marketing material, and verbal persuasion to potential franchisees. However, the information they convey cannot contradict the claims stated in the disclosure documents.
Violations of franchise law and FTC franchise rules can result in significant penalties. In addition to invalidating the franchise contract, violations may also entail injunctions, asset freezes, and civil actions.
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