Franchise Brokers, Franchise Sellers and FDD Disclosures
The franchise sales process is intricate with various lead generation sources and sales activities typically involving a franchisor’s internally employed management team and sales staff and the utilization of outside independent contract franchise brokers. The question that arises for franchisors, their management teams and outside franchise brokers relates to their respective disclosure obligations and whether or not these individuals need to be separately identified as franchise sellers within the FDD and within the state registration process.
To evaluate the respective sales disclosure obligations among all "franchise sellers", it is important to "franchise sellers" between "franchise sales persons" and "franchise brokers":
Franchise Sales Persons and Franchise Sales Brokers
Franchise sales persons are employees of the franchisor and, most typically, include members of the franchisors management team and in-house sales staff. Franchise sales persons also include franchise sales brokers. FDD disclosure obligations require that Franchise Sales Persons (including franchise brokers) be disclosed in (a) the receipt page of the Franchisors FDD, and (b) in the Uniform Sales Agent Disclosure Form filed with each respective registration state.
Additional Franchise Broker Requirements
States like Illinois and Washington State make a distinction between independently contracted franchise brokers who are independent sales persons that are not employed by the franchisor from other franchise sellers, including franchise brokers directly employed by the franchisor. As to the independent contractor franchise brokers, in addition to disclosure in (a) the receipt page of the franchisors FDD, and (b) in the Uniform Sales Agent Disclosure Form filed with each respective registration state, this independently contracted franchise broker may also need to separately register with the state. For example, states like Washington State, California and Illinois require franchise brokers to register with each state by following a more extensive application and registration process that is more extensive than the Uniform Sales Agent Disclosure form.
Franchisors and franchise brokers must carefully evaluate their relationship and their respective disclosure obligations respecting each franchise sales transaction.