Wednesday, October 31, 2012

Franchise Registration Process

Initial Registration

For new and existing franchise systems, registration states can create a headache if the registration process is not handled correctly. The process can be time consuming and expensive, especially if not handled correctly the first time.

There are 14 registration states: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. The initial registration fees vary from $125 to $750. In each of these 14 states, a franchisor must not only comply with the FTC Disclosure Rule, but must also comply with the individual state rules which often impose additional disclosures and restrictions on the franchisor. Simply put, if you are interested in taking your franchise system into one of the above 14 states, you are restricted from offering or selling to either an individual residing in that state, or to an outside individual looking to franchise within that state.

As a baseline, all franchisors must comply with the FTC Disclosure Rule and have appropriate and compliant documents before offering or selling a franchise. From there, a franchisor can add state-specific addenda or create a state-specific FDD for registration purposes.

Depending on the registration state, registration is either immediate (meaning once the state receives the FDD packet and required documentation, the franchisor can begin to offer and sell in that state) or the registration will take time, after an examiner has reviewed all the provided documents to make sure they are compliant with state law. Often a state examiner will provide the franchisor with a list of issues that need to be addressed and corrected (a “Comment Letter”) before the state can register the franchise for offers and sales.


Once a franchise is registered in a state, that registration is generally effective for a one-year period, after which the franchise must be renewed, for a fee, in that state in order for the franchisor to continue to offer or sell there. However, not all registration states count this “year” in the same way. Some states have an expiration one year from the date of registration. Other states have an expiration date of 90-120 days from the end of the franchisor’s fiscal year end. Your registration letter will provide the date of expiration. You should calendar this date and be aware that it might be sooner than expected.

Renewal is also required in all non-registration states. The difference is that once the disclosure documents have been updated (including an updated audit) then the franchisor can generally begin offering and selling franchises in non-registration states. (The one caveat here is that if the state is a business opportunity state, you must make sure you file the appropriate exemption before selling in that state.)

Exemptions from Registration

Both the FTC and Registration States provide limited exemptions to registration. These vary from state to state. In most instances, the exemption only removes the registration requirement, not the disclosure requirement. You will still need to have accurate and up to date documents, and to comply with the timelines for disclosure.

If you are looking at taking your franchise system into a registration state, you should speak with a knowledgeable franchise attorney to ensure compliance with state-specific laws and regulations.

Wednesday, October 17, 2012

The Multi-Unit Franchise Agreement

According to FranData (a franchise services firm), approximately 50% of all franchise businesses are part of a multi-unit franchisee. The clear trend in franchising right now is for a franchisor to find the prospective franchisee with the experience, capital and desire to develop more than a single franchise unit in a territory.

The Multi-Unit franchisee provides many advantages to a franchisor including:

·         Opening franchise units in a more planned and strategic manner
·         Fewer franchisees to manage and oversee
·         Accelerated growth
·         Reduction in training and other initial obligations
·         Faster new market penetration

While the multi-unit development may look like the best way to grow a franchise system, there are some cautions to both the prospective multi-unit franchisee and the franchisor.

Prospective Franchisee
Any prospective franchisee looking at the option of purchasing a multi-unit development agreement should consider their current: 1) experience not only in the industry of the franchise system, but their experience in successfully running a business; 2) access to sufficient capital; 3) current infrastructure or ability to develop the infrastructure to handle the development obligations, operations and administration of all the franchise units.

One clear advantage of the multi-unit option is the ability for a franchisee to leverage success, and the possibility to combine certain operations.

When determining whether a prospective multi-unit operator is going to work within a franchise system, a franchisor should examine the franchisee’s abilities on several fronts, including: 1) whether she/he has strong management experience; 2) do they have experience in the underlying industry; 3) their financial capacity to meet the development and ongoing operational obligations; and 4) a demonstration of their ability to fulfill the development obligations.

Many franchisors will find it beneficial to look to their current franchisees and ask high performing single unit operators if they would like to develop additional franchise units. Another key place to find successful multi-unit franchisees is from another franchise system. If looking to another franchise system, a franchisor should look at the prospective franchisee’s current compliance, reliability and reputation in the franchise system, as well as where they are in that development schedule. This last point is important because while it may appear a prospective franchisee has sufficient capital, if they are in the middle of their development obligations for another franchise system, the capital may not be sufficient to carry them through both development obligations.

When setting out the obligations for a multi-unit franchisee, a franchisor should also be aware of the ability on a functional level to meet the development obligations (i.e. is real estate available at the right price, how easily can the permits be obtained, what type of capital is needed from both the franchisee and the franchisor). In addition, the size of the territory will often determine the development speed and number of units in the development schedule.

More helpful information on multi-unit franchising can be found at: