BUSINESS WATCH

A FRANCHISING PRIMER:   What Business Owners Should Know About Franchising By Andrew T. Schlosser (continued)

 

 

What Rules Apply to Franchises?

 

If your planned business expansion meets the definition of a franchise, federal law requires that you disclose a variety of information to any prospective purchaser through a formal Offering Circular at least ten business days before the franchise is sold or any money changes hands. The contents of the Offering Circular are prescribed by federal law and must include information such as your prior business experience, whether you have recently been involved in any lawsuits or filed bankruptcy, the anticipated costs and expenses that will be incurred in running the franchised business, and a listing of the various responsibilities you and the purchaser will each have once the franchise has been sold. You will also be required to provide the prospective purchaser with a set of your company’s audited financial statements for the past several years.

 

In addition to the federal requirements, many states also require you to file the Offering Circular so the state can review it for compliance with that state’s law before permitting you to offer any franchises. This process can take several months, so you should begin planning well in advance of any proposed sale to avoid last-minute complications.

 

Failure to comply with federal and state franchise laws may result in fines of up to $10,000 per violation, and may also result in your business being required to return all payments to the franchise purchaser and void any future obligations of the purchaser. Directors and officers with knowledge of the violations may even be held personally liable for payment of these items and, in rare cases where failure to comply is intentional, courts may also impose jail time (up to 5 years in some states!) as an added punishment.

 

Final Thoughts

 

Even if your business arrangement does not meet the definition of a franchise, many states also have similar laws for the regulation of business arrangements known as business opportunities. The definition of a business opportunity varies from state to state but is generally broader than that of a franchise, although most business opportunity laws require less extensive disclosures than necessary for franchised businesses.

 

If you are concerned whether any franchising laws might apply to your business expansion plans, or if you would like more information on franchising issues in general, please give us a call so we can discuss your particular situation in more detail.

 

 

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