Franchise Laws

Why are they Important?

Stephen S. Raines
President, National Franchise Associates
Atlanta-based Specialists in Franchise Consulting & Franchise Development Success

In my over three decades as a franchise consultant, I am often asked “What makes one franchise program succeed while another franchise doesn’t?”

Rarely is there a single reason for success or failure in franchising.  Here, I will examine some of the factors that can help you create a successful franchise program.

As a franchise consultant, I often start the franchise development process by discussing franchise laws.  Federal franchise law designates the Federal Trade Commission as the responsible agency.

According to these franchise laws, all franchise prospects must be given the company’s Franchise Disclosure Document (FDD) no later than the first face-to-face meeting.  Federal franchise law, known as the FTC Rule on Franchising, mandates the specific format and the required information for the FDD.

In addition to the federal franchise laws, fifteen states have enacted franchise laws.

Theses state laws typically prohibit the offer or sale of a franchise within the state until a franchise disclosure has been registered by a designated state agency.  The applicable agency in California, for example, is the California Department of Corporations.  These state agencies often have the power to demand changes to the company’s standard FDD created under the federal franchise laws.

With most state franchise laws, the Franchisor must complete the state registration before (1) selling a franchise to a resident of the state or (2) selling a franchise to be operated in a franchise registration state. In addition, if the Franchisor’s home state has state franchise laws, generally the company must register in that state before it can offer franchises in any state.

The fifteen states with state franchise laws include California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. 

Of these, Oregon does not require a registration and Michigan only requires a notice along with the preparation of a state-specific cover page.    These state franchise laws require the payment of a registration fee ranging from $50 to $750.

In addition, the Franchisor should anticipate having to pay legal fees to comply with the specific state’s franchise laws.  Remember, most state franchise laws grant the state regulators the power to compel a Franchisor to make state-specific changes to the FDD before granting registration.

A few states have less complex state franchise laws.

For example, Connecticut and North Carolina require the payment of a fee and the filing of the company’s FDD if a Franchisor does not have a federally registered trademark.

Anyone considering franchising their business should pay attention to both federal franchise laws and any pertinent state franchise laws.