Under federal law, prior offering or selling a franchise in any state, franchisors are required to disclose a franchise disclosure document (FDD) to their prospective franchisees. In addition to federal law certain states, including the franchise registration states, require that franchisors register their FDD with the state. The legal documentation that is and will be required to franchise your business, in large measure, revolves around your FDD, the registration of your FDD with the franchise registration states and the annual renewal of your FDD.
Documentation required to franchise your business, includes the following:
You and your franchise counsel must develop and prepare a franchise disclosure document. The FDD must contain and address the 23 different disclosure items mandated by the Federal Trade Commission. For a more detailed discussion about the FDD including the legal aspects of your FDD and why your FDD will be a blueprint for your entire franchise system, click here. Although you must satisfy federal franchise laws and prepare a FDD in accordance with the mandates of the FTC, at the federal level, your FDD will not be registered with the FTC or any other federal agency.
While the federal rules of the FTC govern all FDD’s and the disclosures contained in FDD’s, certain states (known as the Franchise Registration States ) have enacted their own franchise regulation and requirements where they have supplemented the FTC requirements. Prior to offering or selling a franchise in a Franchise Registration State you must file and register your FDD with the local state agency. In doing so you must complete franchise registration application forms and you must satisfy the supplemental disclosure requirements of NASAA. NASAA stands for the North American Securities Administrators Association and it serves as the governing entity utilized by the Franchise Registration States to create a uniform set of franchise registration applications and disclosure forms. Click here to be directed to a NASAA pdf and that lists the uniform franchise registration forms required for registration in the Franchise Registration States.
Unlike a Franchise Registration State that requires the actual filing and registration of your FDD with the state administration, certain states require that you file a form notifying the state that you will be selling franchises within the state. These filing and notice each have their own filing applications to be submitted to the state.
Equally important to your FDD, your operations manual will be critical to the launch and operation of your franchise system. Although your operations manual will have legal implications (i.e., your FDD will refer to the fact that you have an operations manual and that you will provide your operations manual to your franchisees) it is not a legal document and will not be disclosed to or registered with any government agency. Your operations manual must be confidential, should only be disclosed to your franchisees and will contain the operation detail instructing your franchisees about all aspects of your franchise system and how to operate the business. You can learn more about operations manuals and the contents of an operations manual by clicking here.
As a franchisor within Item 21 of your FDD you must include financial statements for your franchise company. If you recently launched your franchise system then your franchise company will have a limited financial history and the financial statements will not be extensive. Consider and keep in mind that eventually these financial statements must be audited, although there is a limited phase-in exemption that start-up franchisors are afforded as to when and what type of audited financial statements that they require. To learn more about a franchisor’s audited financial statement requirements, click here.
To find out more about franchising your business, order a complimentary copy of our guide “How to Expand and Grow your Business Through Franchising“.
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