Franchising your business means establishing the legal infrastructure, development strategy, and plan to legally and effectively sell franchises to third party franchisee partners. To franchise your business, you must establish a legal infrastructure and platform that complies with federal and state franchise laws and allows you to legally offer and sell franchises throughout the United States.
Your required legal platform must include (1) a Franchise Disclosure Document (FDD) that contains legally mandated disclosures, (2) a franchise agreement and (3) information about your newly established franchise offering, franchise system and the legal relationship that will exist between you and your future franchisee partners. Franchising your business also requires the establishment of a franchising strategy and plan that differentiates your soon to be launched franchise system from competitors and that is designed to scale-up and grow.
Unlike states such as New York, Illinois, California, Maryland, Michigan, Minnesota and Virginia, you do not have to register your franchise in Texas. That is to say, Franchisors do not have to register a Texas registration statement (exempt from filing) with Texas regulatory agencies they comply with all disclosure requirements and prohibitions concerning franchising in the Federal Trade Commission regulations. However, prior to offering or selling a franchise in the State of Texas, a Franchisor must file for an exemption under the “Texas Business Opportunity Law”. The Franchisor files a “one-time only” Business Opportunity Exemption Notice with the Texas Secretary of State for a cost of $25.00
In addition to having filed an exemption notice with the State of Texas before offering or selling a franchise, as a Franchisor, you are required to issue your Franchise Disclosure Agreement at least 14 days before accepting any money or commitments from a potential franchisee. Additionally, Texas charges a $195.00 filing fee for registering your business opportunity which includes a copy of your disclosure statements.
To be successful at offering and selling franchises and growing your franchise system, you must be knowledgeable of both federal and state franchise laws. At the federal level franchising is regulated in accordance with the Federal Franchise Rule and the franchise regulations implemented and enforced by the Federal Trade Commission. At the federal level, franchisors are required to disclose their current and updated franchise disclosure document prior to the offer or sale of any franchise.
Federal Rules-Disclosure Document Compliance
Of course there are both federal rules and state rules that you have to comply with. Under the Federal Trade Commission’s (“FTC’s”) Franchise Rule, franchisors offering franchises, other than exempt franchises, anywhere in the United States or its territories must provide to prospective franchisees a copy of a Franchise Disclosure Document (“FDD”) at least 14 days before the prospective franchisee signs a binding agreement or makes any payment in connection with the franchise sale. The FTC does not register franchise offerings, review FDDs before they are provided to prospective franchisees, or require franchisors to file anything with that agency.
At the federal level, in the absence of an exemption, all franchise sellers must provide all prospective franchisees with the federally required written disclosures pursuant to the FTC Franchise Rule. If a franchisor does not make the required disclosures, the franchisor, its owners, employees and franchise brokers may be subject to significant civil and criminal liability
Texas Rules-Disclosure Document Compliance
Texas Franchise laws prohibit sales of business opportunities unless the Franchisor gives potential purchasers a pre-sale disclosure document that has first been filed with the Secretary of State. The representations made during the marketing and sale of the business opportunity are key in determining franchisor protection under these laws. Franchisees have a private right of actions under the business opportunity law, and the penalties for violating these laws can be extensive including damages, return of fees paid by a franchisee, rescission of the contract, injunctive relief, criminal penalties, and other remedies.
Successful Franchisor Goals
Franchising is a business model that allows successful business owners to leverage their existing business name, community goodwill, assets and know-how to expand their business and brand. To avoid the compliance pitfalls in the State of Texas, a franchisor should have focus goals (there are no short cuts). Your franchise system must be built on a solid foundation that reflects the very best practices in the franchising industry and one that, from the very start, is strategically focused on achieving attainable growth and scalability
Your franchise goals should be based on long-term plans and visions for Franchisor success, Franchisee partnerships and federal and state franchise law compliance. Your goals should include the following long-term action plans:
- Developing and launching a multi-state Franchise Disclosure Document that will legally protect you and allow you to offer and sell franchises in multiple states (even you plan to start only in one state).
- Developing a franchising strategy that is reflected in your Franchise Disclosure Document and that strategically and realistically positions your new franchise system for franchise sales and growth.
- Protecting your trademarks and intellectual property through trademark registrations and confidentiality agreements.
- Develop a franchise operations manual that will be provided to future franchisees and inform you franchisees about your business, your methods of operations, the systems that you have created and rely on and what you expect from them as future franchisee partners.
- Developing and maintaining a franchise compliance process that includes registering your Franchise Disclosure Document with franchise registration states like New York, California, Illinois, Virginia, Maryland and other registration states that are strategic to your expansion plans.
- Successfully launching your franchise system with the right advice and guidance focused on a sales strategy that is grounded in a realistic budget and one that incorporates a multi-sales strategy approach focused on organic sales, broker generated sales and web driven sales.
If you are a new franchisor or thinking about franchising, it is critically important that you focus on your business and establishing a realistic legal and business infrastructure for the successful development and launch of your franchise system. Look for sound business and legal advisors who are focused on preserving and protecting your existing business and network that you have already built, as well as, who are committed to helping you lay the foundation for continued expansion and growth.
If you would like to know more about franchise growth options and how to accelerate your franchise system while complying with Texas and federal franchise laws, we would be glad to talk with you.
Contact corporate attorney Victor D. Walker at 713-724-5300.