Government Regulation of Franchises

In the United States, all franchisors must abide by the Federal Trade Commission’s (FTC) Franchise Rule, which requires franchisors to prepare a disclosure document called the Uniform Franchise Offering Circular (UFOC ) / Franchise Disclosure Document (FDD) and give a copy of that document to prospective franchisees prior to their purchase of a franchise.

The UFOC / FDD document consists of 23 different categories, which contain information such as basic investment, franchise fees, a financial statement of the franchisor and earnings claims (if the company discloses that information), how long the franchise will be in effect, bankruptcy and litigation history (including civil judgments and felony convictions) and information about the franchisor’s executives (such as past experience).

There are fourteen “Registration States” that require franchise companies to file or register their franchise offerings with a state agency. These states are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. These states (and Oregon) additionally have disclosure regulations similar to FTC regulations.

Several other states regulate the offering and sale of “business opportunities” via state business opportunity laws. Arkansas, California, Illinois, Iowa, Minnesota and a few other states regulate the termination of non-renewals of agreements. In California, Illinois, Indiana and Maryland, proposed ads must be pre-approved prior to publication.

As you may very well be aware, the government regulates all businesses, not just franchises. Regardless of what business you’re going into, you’ll have to find out what licenses and/or permits are required before you open that business. Such licenses/permits include a business license from your city’s business license department; a fire department license (if your business uses flammable materials); air and water pollution control permits if you burn any materials, expel anything into sewers or waterways, or use products that emit gas; state licenses for certain occupations like auto mechanics, realtors, barbers and cosmetologists and educations ; a sign permit from your city or county; sales tax licenses from your state department and health department permits.

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