Franchise Disclosure
There are three important areas of regulatory compliance in franchising: (1) Franchise Disclosure, (2) Franchise Registration, and (3) Franchise Relationships.
1. Franchise Disclosure
Before you are allowed to sell a franchise you are required to have a Franchise Disclosure Document ("FDD") prepared. The FDD contains important information about you and your company’s history and operations, financial statements, and other information about your franchise system and your Franchise Agreement.
The FDD must be registered in certain provinces and states prior to selling your franchise.
You are not permitted to offer or sell a franchise without first taking the steps stated above and then giving a FDD to a prospective franchisee prior to having him sign any documentation or taking any money from him. If you fail to follow these steps, you are subject to liability.
Your Franchise Agreement will specify your concepts, methods of doing business, what you offer the franchisee and what the franchisee is obligated to perform. It will also state the up-front franchise fee and the percentage of the gross sales that your franchisee must pay you.
Franchise Registration
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Some Canadian provinces, including Alberta, New Brunswick, Ontario and Prince Edward Island, require franchisors to get registered in order to legally offer or sell franchises in those provinces.
These provinces require submission of a copy of your Franchise Disclosure Document along with other registration application materials and filing fees. In several provinces, pre-sale franchise disclosure is required, but there is no registration or filing requirement.
In the United States, 15 states require franchisors to register their offerings and to provide certain information to prospective franchisees. The Federal Trade Commission also administers its Disclosure Rule, which set minimum disclosure requirements at the national level.
Franchise Relationships
In Canada, franchise relationship issues are generally non-regulated, except that provincial legislation requires both parties to deal fairly with each in respect of their performance and enforcement under the Franchise Agreement.
In the U.S., about 17 states have adopted laws that protect franchisees from abusive behavior by franchisors after the franchise relationship has commenced. These laws are intended to be helpful for franchisees and often override inconsistent terms in the Franchise Agreement.