Franchises are a great way to start a new business. Owners are called franchisors. Investors are called franchisees. The business is established and systems are already developed. The brand is known in the community, and the franchisor typically provides training and support. The franchisee commits money, time, and work to the business and runs the franchise location. While franchise locations are often independently owned and operated by the franchisee, investment is a serious commitment with financial risk. The franchisee must operate by the franchisor’s play book. The franchisee is typically a LLC or corporate entity.
If you’re considering buying or selling a franchise, where do you start? Franchises are not simply multiple locations of a business. They are regulated by the state and federal government and must meet legal requirements to operate and expand. So it’s best to start with the government agencies that regulate franchises.
Federal Regulation of Franchises
Franchises are regulated by the Federal Trade Commission. A franchisor’s responsibilities are set out in the Franchise Rule. As an example, franchisors must provide significant financial disclosures called a Financial Disclosure Document (FDD) to anyone considering investment. The disclosure must contain certain, specific information. It must also follow a specific format. There are a lot of details and requirements for the FDD, so this document is voluminous. It’s also a sales document. Franchisees typically consider several franchise options in deciding the best fit for their business goals and needs. The FDD therefore seeks to sell the business to the franchisee and convince the franchisee that this is the best option. This Federal Trade Commission’s website is a great resource for information: www.consumer.ftc.gov/articles.
State Regulation of Franchises
Franchises are governed by the Texas Business Opportunity Act. Texas is not a franchise regulation state. If the FDD is current and in compliance with federal rules, the franchisor does not also need to register it with the State of Texas. Instead, the franchisor must file a Business Opportunity Exemption Notice with the Texas Secretary of State.
Due diligence is key if you are looking to buy a franchise, and obtaining legal advice early in the process is a critical part of completing your due diligence.