Is your client operating a franchise?

July 15, 2014

business transactionsFranchising 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 (§§ 45:56 et seq.) and state (§§ 45:66 et seq.) level. 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”) (§§ 45:56 et seq.) and the 2008 Franchise Registration and Disclosure Guidelines (the “Uniform Franchise Disclosure Document Guidelines” or “UFDD Guidelines”) (§§ 45:14 et seq.) 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 first meeting with a client about a franchising opportunity, counsel should take the time to evaluate whether or not the proposed venture does, in fact, fall within the scope of the franchising laws. One method that can be used is a brief questionnaire that can be presented to the client prior to the meeting and discussed at the time that the client presents his or her ideas regarding the particular venture.  The revised and updated Specialty Form at §45:176 is a questionnaire that can be used to walk the client through the analysis of the existence of a franchise relationship. Questions cover not only the key factors of the franchise definition, but also common exemptions and exclusions.