USA Trends and Developments Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison D. Marzocco, Rosen Karol Salis, PLLC
Marketing Franchisees are almost always required to contrib - ute to a national marketing fund and typically cannot conduct local marketing without franchisor review and approval. Technology and software Franchisees are typically required to utilise franchisor- mandated technology and software, including, for example, specific point-of-sale and inventory man - agement systems. Restrictive covenants Franchise agreements impose certain in-term and post-term restrictive covenants and non-solicitation provisions, limiting the franchisee’s ability to compete with the franchisor. The Franchisor’s Obligation Regarding Registration and Disclosure Franchising in the USA is regulated by a patch - work of federal and state franchising laws. In 1978, the FTC promulgated 16 CFR Part 436, which was subsequently amended in 2007 (the “FTC Franchise Rule”) to regulate the offer and sale of franchises in the USA. While many states have franchise-related laws, surprisingly there is no uniform legal definition of a “franchise”. The FTC Franchise Rule imposes a pre-sale disclosure requirement on franchisors that applies to the offer or sale of all franchises throughout the USA, obligating franchisors to furnish prospec - tive franchisees with information and data regarding the material terms of the franchise relationship prior to negotiating with prospective franchisees or con - summating the sale or offering of a franchise. This “disclosure” takes the form of an offering prospec - tus commonly referred to as the Franchise Disclosure Document (FDD). 15 states have state registration and/or disclosure franchise statutes that require the franchisor to reg - ister the franchise with the appropriate state agency before the franchisor is permitted to offer and sale franchises in that state, and to provide an updated FDD to prospective franchisee before any fees are paid or any agreement is entered into. 25 states have Business Opportunity Laws which require franchise sellers to register their business opportunity – ie, filing
a form with the appropriate state agency that disclos - es certain limited information to prospective consum - ers who purchase business opportunities, including franchises. Selecting the Franchisee There is an old joke in franchising. • Question: “What does a franchisor look for in a prospective franchisee?” • Answer: “Anyone with a pulse and a checkbook”. This joke reflects the fact that many franchisors are desperate to achieve growth and sometimes are not discerning as to which franchisees they select for their franchise system. Franchisors are well served when they select their franchisees after a screening process known as franchise due diligence, which evaluates, for example, a candidate’s financial stability, operational readiness, reputation, character and compatibility with the system before awarding a franchise. Expansion Franchisors have different ways to accomplish their goals of franchise expansion. In addition to selling sin - gle-unit franchises under a franchise agreement, many franchisors also offer multi-unit (or area) development deals to well-financed franchisees, under a multi-unit development agreement. Under this arrangement, the area developer pays a development fee to the fran - chisor and contracts to open and operate a set num - ber of franchise locations within a specific geographic territory, over a defined timeframe and in accordance with a defined development schedule. Alternatively, franchisors, especially international fran - chisors seeking to expand their franchise system into another country (such as the USA), contract with a “master franchisee” which functions as a “sub-fran - chisor” for a large territory (often a large state or entire country). Under this arrangement, the master fran - chisee (sub-franchisor) recruits, trains and supports the sub-franchisees within its territory on behalf of the master franchisor (the franchisor), and the master franchisee pays the franchisor a percentage of the royalties and initial franchisees paid by the sub-fran - chisees.
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