Who is a Franchise Seller?
If you are an officer, employee, representative or broker involved in the offer or sale of franchises, you are a “franchise seller.”
Your involvement in the offer or sale of franchises may be obvious, such as if you are a salesperson actively pursuing franchisee prospects for a franchisor, are signing agreements with new franchisees, or are accepting payments from new franchisees.
Or, your involvement may be less obvious, such as if you are participating as a finder or consultant in discussions with prospects about their business interests, pre-screening prospects through questionnaires, recommending franchise options, or assisting prospects in completing franchise application forms.
In either case, you are involved in the offer and sale of franchises, making you a franchise seller – who has to comply with a number of regulations.
What are Your Obligations as a Franchise Seller?
As a franchise seller, you must comply with the FTC franchise rule and numerous state laws that regulate the offer and sale of franchises.
The FTC franchise rule requires a franchisor to prepare a Franchise Disclosure Document, known as an FDD; to keep the FDD updated as “material changes” occur, new audited financials are issued and new fiscal years phase in; to follow and have its franchise sellers follow basic franchise sales steps in dealings with prospects; and to modify the basic franchise sales steps in certain special situations.
In addition, the FTC franchise rule permits and prohibits specific activities during the franchise sales process. The FTC franchise rule does not require a franchisor’s FDD to be filed with the FTC, but it does permit the FTC to investigate and punish franchisors and franchise sellers believed to have violated the rule.
What are the Penalties for Non Compliance?
If you do not meet your obligations under the FTC franchise rule and state franchise disclosure laws (“state laws”), you and the franchisor you represent could suffer significant penalties.
The most frequent penalty is a claim or lawsuit by a franchisee which is costly to defend, and which results in a settlement or judgment requiring the franchisor to rescind or void the franchise agreement, refund the franchisee’s payments, or reimburse the franchisee’s damages, attorney’s fees and costs.
This penalty can be financially debilitating or devastating.
Another common penalty is the loss of your job or relationship with a franchisor.
The states often seek penalties, including orders which must be disclosed to prospects for 10 years or longer, monetary payments to franchisees or the states, or restrictions on your future business activities.
In some instances, a penalty may be an FTC investigation that results in an order which you must disclose to future prospects, a freeze of your assets, civil penalties of up to $10,000 per violation, payments to franchisees, or an injunction.
In rare instances, a penalty may be a state criminal prosecution against you.
Hopefully, your desire to make legal franchise sales and this array of possible penalties will motivate you to make a serious effort to meet your legal obligations during the franchise sales process.
How to Effectively Comply.
Education which leads to permanent changes in business methods is the best way to effectively comply with the franchise sales laws. To facilitate this process, we, at Akerman, have identified 11 distinct steps of franchise sales compliance which need to be understood.
Here are the entire steps in more detail.
Step 1: Current FDD
Step 2: State Registration or Notice
Step 3: Notice of FDD Formats Available
Step 6: Minimum Disclosure Timing
Step 7: Receipts
Step 10: Execution of Agreements
Step 11: Post-Sale Obligations
If you would like to know if you can franchise your business, connect with me on LinkedIn and give me a call.