Do I Need a Franchise Agreement for Different States?

We get this question from prospective franchisees all the time. The short answer is yes.

The reason this topic is a source of confusion for so many of our clients lies is the common misconception that a franchise agreement and a Franchise Disclosure Document (FDD) are the same thing. They are not.

What is the Difference Between an FDD and a Franchise Agreement?

Franchises in the U.S. are regulated by both federal and state laws.

At the federal level, the Federal Trade Commission requires all franchisors to provide prospective franchisees with an FDD. This is a non-binding document that must list 23 items of information about the franchise. We call that the Franchise Rule.

The purpose of an FDD is to ensure franchisees can make an informed decision as to whether they want to proceed with the investment.

This is where things get tricky. At the state level, different jurisdictions have different rules regarding FDDs. Depending on the state, franchisors need to either register, file, or merely disclose their FDDs.

In any case, however, the franchisor must supply the prospective franchisee with an FDD no later than 14 days before the signing of the franchise agreement.

What is a Franchise Agreement?

This is a legally binding contract regulated at the state level. It sets forth the terms of the franchisor-franchisee relationship, as well as their respective rights and obligations.

While signing a franchise agreement is mandatory for all states, there is no standard form or template. A typical agreement will contain the 23 items from the FDD, additional proprietary information, and more. Overall, the contents of franchise agreements can vary widely depending on the nature of the business and state jurisdictions of the parties.

If you are a prospective or current franchisor, it is important to know that several states have enacted laws that curb your ability to terminate or withhold consent to the transfer or renewal of franchise agreements.

Further state-specific rules govern issues such as market protection and encroachment. These regulations can be incredibly convoluted and venture into other fields of legal practice, including trademark, intellectual property, contract, and employment law.

Given all that, it is absolutely critical to consult a franchise lawyer before signing a franchise agreement.

Thinking of Buying a Franchise?

State franchise laws at times baffle even experienced legal professionals. The good news is that our specialty at The Franchise & Business Law Group – among other things – happens to be franchise agreements.

Drop us a line today to protect your interests and ensure your franchising agreement is watertight.