(FS6) The FDD and the Law
You should feel some security in knowing the law requires franchisors to inform franchisees about the systems they run in their companies. The information that the law requires franchisors to share should be found in the FDD and if it’s not, back away from the company because they are not in compliance with the law. If a franchisor doesn’t offer you an FDD, that’s another red flag as under federal and state law, franchisors are required to present FDDs to franchisees before an offer can be made.
Can the FDD Lie?
Though don’t take that as 100% assurance that the FDD is fool proof. The federal government doesn’t require companies to register their FDDs for approval. Only 14 states require that franchises register their FDDs with the state before they can begin conducting any franchising activities there. All the other states simply have business-opportunity laws which require the franchise to file a notice with the state, but do not require the franchisor to forward the FDD to any state agency.
The laws regarding the FDD mostly stick to requiring a franchisor to disclose information about themselves as well as the terms of the agreement to the franchisee. There is a separate entity called the relationship law that gives protection to the franchisee. Through this protection, the franchisee has a shield against certain actions by the franchisor like arbitrary termination, nonrenewal of the franchise, or the freedom of form franchisee association.
Not All States Follow the Same Rules
Only 19 out of 50 states has it listed as unlawful for a franchisor to terminate a franchisee relationship without a ‘good cause’. Those other 31 states provide franchisees with the opportunity to fix whatever the problem is that the franchisor has with the franchisee. This time can range anywhere from 30-90 days. 18 states have restrictions on a franchisor’s ability to not renew a contract with a franchisee at the end of the term. Most states require ‘good cause’ in order for a franchisor to reject contract renewal, the laws, and the protection vary from state to state. To find out about specific states, research franchising laws in the state or country of your choice before proceeding any further.
Regulations Are Made to Protect Others
While we may hate all of the rules and regulations, they are in place at the interest of the franchisee and franchisor. They want to insure that no tampering happens in the relationships between the franchisor and the franchisee. They also provide competition between franchisors for franchises through merit and systems that are in place. Thanks to the FDD and disclosure rules, franchisors have to present information about their franchise to franchisees and with this information, individuals can make intelligent, informed decisions based on research and fundamentally, success is based on a strong, knowledgeable foundation.