The franchisor has just informed you that the franchise disclosure document (“FDD”) is finally ready to go, and you are thrilled to begin talking to prospective franchisees about the best new concept you’ve seen. You are of course aware of the requirement to register in certain states https://www.franchisefeed.net/2024/07/franchise-state-compliance/ with franchise registration and disclosure laws, but as you start talking with candidates, it’s not always clear when these state laws apply. What are the things you need to learn about the prospective franchisee in order to comply with these laws?
The jurisdictional applications of a state’s franchise laws are specific to that state. There’s not just one rule that applies everywhere. You and your attorney should always review these laws on a case by case basis to ensure compliance.
Nevertheless, below are some essentials to consider before you engage in any sales conversations or other forms of offering or selling the franchise opportunity.
- Where is the franchisor targeting its franchise marketing and advertising?
- Where does each owner of the prospective franchisee personally live?
- Where does the prospective franchisee want to open the business?
- Will the protected or operational territory of the business cover multiple states?
- Where is the franchisor’s headquarters?
- Where are you engaging in conversations and sending materials from?
- Where are the owners of the prospective franchisee at the time that you disclose the FDD to them or have other sales conversations?
- If applicable, where is the in-person meeting occurring?
These inquiries are relevant because the state laws will apply to all or a combination of each of these locations: where a franchisee is domiciled (residing), where the franchised business is to be located, where the offer is made, and where the offer is accepted. Importantly, more than one state law can apply to any deal if the facts are right.
In the fact pattern below, arguably the franchise laws of Wisconsin, Minnesota, Illinois, Maryland, Indiana, and Washington would apply to the marketing and sale of the franchise. Accordingly, before having any sales conversations or engaging in any other franchise sales efforts, you would need to make sure the FDD has been properly registered with each state.
The new franchisor is located in Wisconsin. The franchisor targets its franchise recruitment digital advertisements to people in neighboring states Minnesota, Iowa, and Illinois.
Two brothers, Bob Roberts and Robby Roberts, want to go into business together. Bob lives in Iowa where there are no franchise registration laws. Bob is the recipient of the franchise marketing for the new concept and gets excited. Bob tells his brother, Robby, about the opportunity and together they schedule a call with you. Robby will not be operating the business but will contribute a significant amount of the upfront capital as an owner. Robby lives in Maryland. Because of the distance between Maryland and Iowa, the brothers tell you they want to split some of the difference and open in Indiana.
After two calls with you, Bob and Robby go cold. But in a few months they let you know they are ready to receive the FDD. You send it to them by email. On the call to review the FDD with the brothers, you learn that Robby has relocated to Washington, where he requested and received the FDD.
After a bit more validation by both the franchisor and the prospective franchisees, the Roberts brothers are ready to sign a franchise agreement. Bob signs his copy in Iowa and Robby signs his copy in Washington. They begin development of their new business in Indiana.
Franchisor sales staff, outsourced franchise sales organizations, and franchise broker organizations should develop practices that quickly and systematically determine all of the relevant locations triggered by a specific prospective franchisee or ownership group. As this hypothetical indicates, it also helps to verify that those locations have not changed during the course of the deal.
When in doubt, or for more pro tips, talk to franchise attorneys at Manning Fulton & Skinner.