Is Your Business a Franchise?

Franchising is extremely popular and franchised businesses have been a significant sector of the United States economy for some time. The franchise system is based upon long-term contracts for the transfer of products, know-how, and goodwill by franchisors in exchange for a share of the revenues of businesses operated by franchisees.  Franchising is subject to government regulation on both the federal and state level, and franchise laws generally reflect a concern for the purchasers of franchises by regulating franchise sales and requiring disclosures and/or registration in connection with such sales.

The key regulatory elements in the franchising area are the Federal Trade Commission's Rule on Franchising (“FTC Rule”) and the 2008 Franchise Registration and Disclosure Guidelines (the “Uniform Franchise Disclosure Document Guidelines” or “UFDD Guidelines”) promulgated by the North American Securities Administrators Association (“NASAA”). In adopting the UFDD Guidelines NASAA has embraced the disclosure requirements set forth in the FTC Rule with minimal additional requirements.

When beginning the planning for a new business venture, the entrepreneur should take the time to evaluate whether or not the proposed business does, in fact, fall within the scope of the franchising laws.  One method that can be used is to meet with an experienced lawyer to go over the elements of the new business and see how they stack up against the key factors of the definition of a "franchise" and the most common exemptions and exclusions.  Westlaw Next subscribers can access a detailed questionnaire to walk clients through the analysis at §45:176 of Business Transactions Solution. 

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