What exactly are the required legal documents for a franchise business?
As a franchise consultant, a comment I often hear is “I’ve been told that when you franchise your business, you have to create extensive legal documents. Is this true?” The answer is yes and no.
Yes, all Franchisors are required to create two legal documents. However, the format and contents of these documents is clearly spelled out and the process for creating them is not overwhelming. A good franchise consultant can streamline the process for you when you franchise your business.
Required Franchise Legal Documents: FDD & Franchise Agreement
The first document needed when you franchise your business is a Franchise Disclosure Document (FDD) and Exhibits. The FDD is a required legal instrument that discloses various facts about the franchise company and the Franchise Agreement. It must be drafted in a precise manner when you franchise your business. There are specific items of information that must be disclosed in a certain format. This document must be written in “plain English”, not in legalize.
The Franchise Agreement is the second required legal document when you franchise your business. The Franchisor and Franchise Owner must sign this legal instrument which sets forth all of the mutual obligations of the parties. This is the governing document for the duration of the franchise relationship.
When you franchise your business, the governing agency in the federal government is the Federal Trade Commission (FTC). All Franchisors, from McDonald’s to the newest franchise company, must comply with the rules and regulations promulgated by the FTC. Before the FDD rules and regulations were created in 1979, all a potential Franchise Owner got from the Franchisor was a copy of the Franchise Agreement.
The FDD has 23 required topics to be disclosed in the document when you franchise your business. Some of the issues include the Franchisor and its affiliated companies, biographical information about the officers, directors and franchise personnel, litigation and bankruptcy data, the initial franchise fee, on-going royalties, marketing requirements, the anticipated initial investment, Franchisor obligations, territory restrictions, trademarks, copyrights and proprietary information, optional financial performance representations and a discussion of the franchised and company-owned outlets.
When you franchise your business, you must furnish the FDD no later than the first face-to-face meeting with the franchise prospect. A period of 14 calendar days must go by before the franchise prospect is eligible to sign the Franchise Agreement.
The FDD is sufficient for 35 states. When you franchise your business, there are 15 states that require franchise companies to register with the state franchise regulators. These states are Virginia, Maryland, New York, Rhode Island, Washington, Oregon, California, Hawaii, Illinois, Indiana, Minnesota, Michigan, Wisconsin, North Dakota and South Dakota.
Thinking About Franchising?
NFA Franchise Consultants have the experience to help businesses franchise. Just watch and listen to some of our client case studies and video testimonials. We can HELP YOU and it doesn’t cost anything to call and talk to us!
So, if you are still asking the “should I franchise my business” question over and over with no clear direction, give us a call at (706) 356-5637, or contact us through our online form. We look forward to helping you take your business to the next level and beyond.