Franchise Laws and Rules FAQ

If you are considering buying a franchise, you'll need to know numerous laws and rules. Franchises can be great business models for new entrepreneurs, but there are unique considerations before moving forward with one.

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Follow along as FindLaw helps guide you through some of the more prominent issues that may arise.

• How do I raise franchise startup costs?
• Can a franchise system control what I do?
• Will a franchise company pick my franchise location?
• Can I open my new franchise anywhere?
• Can a franchise business owner pick their designs?
• Am I able to sell other items at my franchise business?
• What are some typical franchise restrictions?
• Can a franchise terminate my franchise agreement?
• How do I renew a franchise?
• Are there different types of franchises?
• Where can I get a company's pre-sale disclosures?
• How can I find out about complaints against a company?
• How do I send a consumer complaint request to the FTC?
• How can I file a complaint against a company?
• Where can I get the forms to draft an offering circular?

How do I raise franchise startup costs?

Before you can gain brand recognition as a franchise, you need to raise funds for your initial investment. You can do this the same way you would for a new business. Small Business Administration (SBA) can offer financing if your regular bank cannot extend a loan to you.

Can a franchise system control what I do?

To ensure uniformity, franchisors typically control how franchisees operate. These controls restrict your ability to exercise your own business judgment at startup and when running your franchise business.

Will a franchise company pick my franchise location?

The franchise company can refuse your proposed location in exchange for a franchising right. Many franchisors pre-approve sites for prospective franchisee locations. This may increase the likelihood that your new location will attract customers. The downside is that the franchisor may not approve the site you want.

Can I open my new franchise anywhere?

Franchisors can limit your operations to a specific territory. These restrictions mean other franchisees can't compete for your customers. It can harm your ability to open additional locations. Make sure to read your franchise agreement to see if there will be future territory restrictions or if you have an exclusive right of first refusal.

Can a franchise business owner pick their designs?

Franchisors may impose design or appearance standards to ensure the customer base receives the same quality of goods and services in each location. This is why you see the same signage and dining room at most fast food franchises like McDonald's that you visit. Some franchisors require seasonal design changes. Complying with these standards may increase your costs.

Am I able to sell other items at my franchise business?

Typically, a small-business owner cannot sell unapproved items in a franchise. Franchisors may limit what you sell. For example, as a restaurant franchise owner, you may be unable to add popular items to your menu or delete unpopular items. As an automobile transmission repair franchise owner, you might be unable to perform other automotive work, such as brake or electrical system repairs.

What are some typical franchise restrictions?

Franchisors may require you to operate a certain way. Depending on the type of business you invest in, the franchisor might require you to:

• Operate during certain hours
• Use only pre-approved signs
• Use certain employee uniforms
• Only use pre-approved advertisements or company photos on social media
• Adhere to accounting or bookkeeping procedures
• Purchase supplies only from pre-approved suppliers, even if you can buy similar goods elsewhere at a lower cost

These restrictions stop you from operating your location as an independent business.

Can a franchise terminate my franchise agreement?

You can lose the right to your franchise if you do not follow it (breach the franchise contract). A franchisor can end your franchise agreement when you do not do what you should do.

Some examples are:

• Not paying franchise royalties
• Not abiding by performance standards
• Ignoring sales restrictions

You lose your franchise fee investment when your franchise terminates your contract.

How do I renew a franchise?

Your franchise opportunity and franchise contract are limited. Franchise agreements typically last 15 to 30 years without a renewal guarantee.

Renewals do not need to abide by your contract's original terms and conditions. Royalty payments may increase. New design standards could happen, too. Your previous territory can be reduced. This results in more competition from company-owned locations or other franchisees.

Are there different types of franchises?

You can choose from multiple types of franchise businesses in the franchise system. You could pay royalty fees to use a franchise's logo and sell its products. You may also decide to open an entire franchise location.

Where can I get a company's pre-sale disclosures?

Fifteen states keep franchise offering circulars on file:

• California
• Hawaii
• Illinois
• Indiana
• Maryland
• Michigan
• Minnesota
• New York
• North Dakota
• Oregon
• Rhode Island
• South Dakota
• Virginia
• Washington
• Wisconsin

Twenty-five states require business opportunity disclosure filings:

• Alaska
• California
• Connecticut
• Florida
• Georgia
• Illinois
• Indiana
• Iowa
• Kentucky
• Louisiana
• Maine
• Maryland
• Michigan
• Minnesota
• Nebraska
• New Hampshire
• North Carolina
• Ohio
• Oklahoma
• South Carolina
• South Dakota
• Texas
• Utah
• Virginia
• Washington

Most states cannot provide copies of these disclosures, but usually will let you visit their offices and review or copy the documents by appointment. A few private companies may also make available franchise disclosure documents filed for a fee. See the Federal Trade Commission's (FTC) website for more detailed information.

How can I find out about complaints against a company?

The Federal Trade Commission (FTC) can only report on whether it has received consumer complaints about a company. Operators of fly-by-night franchises and business opportunity scams know this. These companies may change the name and location of their company every six to 12 months, so they never have a record of consumer complaints.

There is no substitute for checking the track record of a franchisor or business opportunity seller by talking to multiple prior purchasers in person. That is why the Franchise Rule requires companies to provide contact information for at least the 10 prior purchasers who are geographically closest to you. This information is found in the FDD.

How do I send a consumer complaint request to the FTC?

Any request to the FTC must be in writing if you want information about consumer complaints. The commission needs to check whether complaints have been received in Washington and its 10 regional offices. You can address your request to:

Freedom of Information Act Request

Consumer Response Center ("CRC")

Federal Trade Commission

Room 130

600 Pennsylvania Avenue, NW

Washington, D.C., 20580

Identify your letter as a "FOIA Request" and include:

1. Your name
2. Your address
3. Your phone number
4. The name and address of the company you are checking on

In most cases, there are no fees for searching, document review, or copying for members of the general public. However, it is a good idea to state the maximum you are willing to pay so the FTC can contact you in the event that any applicable fees for these services will cost more than the limit you set.

How can I file a complaint against a company?

The FTC lacks the resources to investigate every individual complaint it receives. For this reason, you should consider talking with a private attorney about the feasibility of bringing a private lawsuit. You can also talk to other individuals or consumer groups that may help resolve the problem.

A short letter with any copies of misleading information or documents is fine. Just tell the commission what you think was misleading or deceptive in the company's promotional materials, FDD, or offering circular. Note that your complaint is public record unless you write, "confidential."

Please address your complaint to:

Franchise & Business Opportunity Complaint

Federal Trade Commission - Rm. 238

Washington, D.C., 20580

You can also file a fraud report. Consumer complaints help identify companies and practices that affect a broad segment of the public. Complaints are helpful for law enforcement purposes, too.

Where can I get the forms to draft an offering circular?

The Franchise Rule provides its own disclosure format. The FTC also permits the use of an alternative disclosure format called the Uniform Franchise Offering Circular (UFOC), which is issued by the North American Securities Administrators Association.

Using a Franchise Lawyer to Help You

The Franchise Rule and accompanying laws are complicated. Simplify your life by hiring an experienced business law attorney to instruct you on the rules set up by both federal and state governments. If you are thinking of bringing a lawsuit, you must have legal counsel by your side.

To learn more, see FindLaw's Small Business section.