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Special Disclosure Situations

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The special situations described below may excuse you from following, or may modify how you follow, the basic franchise sales steps described earlier in this handbook. As to each prospect, you must determine whether a special situation applies and how that affects your disclosure obligations.

If you think a special situation is involved, check with the franchisor's lawyer or compliance manager before making a decision not to follow the basic franchise sales steps.

Situation 1: Transfer of Franchise

FTC Franchise Rule. Under the FTC franchise rule, if an existing franchisee is transferring a franchise to a new owner, you must follow the basic franchise sales steps for the new owner if the terms of the new owner's agreements will be materially different from the terms of the existing franchisee's agreements, or if the franchisor has had or will have significant involvement with the new owner during the transfer process.

If the new owner will be signing the franchisor's current agreements, as opposed to the agreements previously signed by the existing franchisee, it is likely that the current agreements contain materially different terms and that you must follow the basic franchise sales steps. Or, if you or the franchisor located the new owner for the existing franchisee, or have or will become involved in "selling" the new owner on the benefits of becoming a franchisee, it is likely that you are required to follow the basic franchise sales steps.

If the new owner will be assuming the agreements previously signed by the existing franchisee, and if you and the franchisor have been or will be involved with the new owner during the transfer process only to determine whether to approve the transfer and to negotiate the terms of the franchisor's consent to the transfer, it is likely that you are not required to follow the basic franchise sales steps. This will be very advantageous if the transfer is occurring in a regulatory state and the franchisor is not currently registered or on file with the state, because you may proceed without following the basic franchise sales steps.

However, even if you are not required to follow the basic franchise sales steps, the franchisor may have a policy of requiring you to provide the new owner with an updated FDD "for informational purposes" before the transfer occurs. Check with the franchisor's lawyer or compliance manager before making a decision not to follow the basic franchise sales steps.

State Laws: The laws of the regulatory states  generally are consistent with the FTC franchise rule, but they contain some anomalies.

For example, the New York law requires the existing franchisee (seller) to furnish to the prospective franchisee (buyer) a copy of the franchisor's FDD currently registered with the New York Department of Law, at least 7 calendar days before the earlier of payment by the buyer to the seller, or the execution of any binding purchase agreement.

Most of the state laws excuse an existing franchisee from registering or filing a notice before dealing with a prospective new owner, as long as the transfer involves an entire franchise. Special rules may apply if the transfer involves just part of a franchise, such as part of a territory. Some state laws are silent on how transfers should be handled, but generally are enforced consistent with the approach under the FTC franchise rule. If you think a state law might apply, check with the franchisor's lawyer or compliance manager about any special requirements. 

If you would like to know if you can franchise your business, connect with me on LinkedIn and give me a call.

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About this Entry

This page contains a single entry by Warren Lewis published on January 27, 2013 5:19 PM.

Franchisor Ordered to Pay Franchisee a $Million Dollars was the previous entry in this blog.

Do You Know Why Service Franchisors Love Five Year Agreements? is the next entry in this blog.

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