In the minds of some, franchising might seem like the Wild West, with brands choosing to open anywhere at any time. That may have been the reality at one point, but these days, things are different. Now, there is extremely detailed regulatory legislation that can vary from state to state.
According to Charles Internicola, managing partner and founder of The Internicola Law Firm, PC, there are some serious implications if these regulations are misunderstood, especially for emerging brands.
“The states and getting your FDD (Franchise Disclosure Document) registered in those states has become the hub of franchise compliance for brands looking at expanding to these areas,” said Internicola. “The biggest issue franchisors run into relates largely in the ability to authorize the sale of a franchise in those states prior to registering.”
Internicola went on to say that often times a civil suit will be filed by the franchisor, which can lead to a franchisee being able to break their agreement and to be paid damages, as in their investment.
“We see it all the time—startup franchisors will jump the gun and start talking to someone in a registration state or even has someone in a registration state sign an agreement. This can be very bad for that brand,” Internicola said. “Doing so negates the franchise sale and will lead to the franchise having to legally notify the system of a rescission notice and pay all initial fees to the franchisee involved.”
That kind of payout can be a tall order for any franchise brand. Regulations and laws around franchising are constantly changing and fluctuate on the federal and state level. Always consult a franchise lawyer and research individual state laws before making any moves.