Buy a Franchise
Understanding the legal foundation behind franchising, including disclosure documents and requirements, is critical. Franchise attorney Tanya Nebo explains what must be in place before franchising.
What legal documents are required to franchise? For any business considering franchising, the answer goes far beyond a single agreement. Franchising is a heavily regulated business model. Before a brand can legally offer franchises, it must have a specific set of legal documents in place to comply with federal and state law (and to protect both the franchisor and prospective franchisees).
Understanding what’s required early can help brands avoid costly missteps, delays and regulatory issues as they prepare to franchise.
According to Tanya Nebo, a franchise attorney at Clark Hill, there are several foundational documents every franchisor must prepare before attempting to offer or sell franchises.
“First, a Franchise Disclosure Document. And as part of that Franchise Disclosure Document, there will be the franchise agreement,” said Nebo. “Third, there are state registration requirements or notices that are necessary, depending on the jurisdictions in which someone is going to offer franchises. Lastly, there are the corporate documents for the franchisor. And that may involve more than one entity.”
These documents matter. Together, they form the legal framework that governs how a franchise system is disclosed, sold and operated.
The Franchise Disclosure Document, commonly referred to as the FDD, is the centerpiece of franchising compliance. It’s required by the Federal Trade Commission. And it must follow a standardized format that contains 23 specific items that disclose material information about the franchise system.
“The Franchise Disclosure Document is the document the franchisor uses to provide information,” Nebo said. “As the name suggests, it is a disclosure document.”
And the purpose of that document is education (not persuasion).
“The franchisor provides information that is intended to educate the prospective franchisee on the nature of the franchise system being offered as well as the individuals who are in leadership with the franchise,” Nebo said. “It is a very comprehensive document that addresses various elements of the franchisor and its system and its purpose is to inform a prospective franchisee.”
Importantly, the FDD also includes the franchise agreement, though only as a template.
While it appears inside the FDD, the franchise agreement is a separate, yet equally critical, legal document. It governs the ongoing relationship between franchisor and franchisee once the franchise is awarded. The distinction between the two documents is often misunderstood.
“The Franchise Disclosure Document is a disclosure document governed by federal law, essentially by the Federal Trade Commission. It educates the prospective franchisee and ensures they receive material information before they sign anything. It is not a contract,” Nebo explained. “The franchise agreement, on the other hand, is a contract. The version that appears within the Franchise Disclosure Document is a template. It is an example of what a franchisee would be expected to sign. But it is not binding until the parties actually sign it.”
In addition to federal requirements, many states impose their own franchise laws. Some require franchisors to register their FDD before offering or selling franchises within the state, while others require notice filings. These state-level requirements are one reason franchising is considered a unique business model.
“The purpose there is regulatory oversight and consumer protection,” Nebo said. “This is one of the things that makes franchising distinctive, in that there is additional protection provided by the Federal Trade Commission before someone actually goes into business with a franchisor.”
Failing to comply with state registration rules can delay franchise sales or trigger enforcement actions. It can be a costly mistake.
Beyond franchise-specific documents, franchisors should also properly document their internal corporate structure.
“In many instances, there are at least a couple of entities,” Nebo said. “One is the franchisor entity that is selling the franchises. And often there is another entity that may be an affiliate of the franchisor and might own the intellectual property.”
Each entity must be properly formed and documented.
“If it is a limited liability company, it should have an operating agreement. Properly formed LLCs have operating agreements. If it is a corporation, there should be bylaws, shareholder agreements and related documents,” Nebo said. “Before offering franchises to prospective franchisees, a franchisor should have its ducks in a row, with its corporate documentation in place.”
Five considerations for businesses evaluating what legal documents are required to franchise:
So, what legal documents are required to franchise? At a minimum, franchisors need a compliant Franchise Disclosure Document, a carefully drafted franchise agreement, applicable state registrations or filings and fully formed corporate documents.
Together, these materials protect both sides of the franchise relationship. This helps ensure the system launches on a solid legal footing. For brands serious about franchising, working with experienced franchise counsel can help navigate these requirements with confidence and avoid costly mistakes that can derail growth before it even begins.
Franchising rewards preparation and consistency. And when it comes to legal documents, getting it right from the start is not optional.
Want to learn more about franchise opportunities on 1851 Franchise? Be sure to visit our Power Rankings to read more on brands making moves.
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