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Do You Know What to do in These Two Special Disclosure Situations? Renewal or Modification

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1.  Renewal or Extension of Franchise

FTC Franchise Rule. Under the FTC franchise rule, if the franchise of an existing franchisee is being renewed or extended, you must follow the basic franchise sales steps if the existing franchisee signs agreements with materially different terms, or if there is an interruption in the operation of the franchisee's business.

If the franchisee will be signing the franchisor's current agreements, as opposed to the original agreements signed by the franchisee, it is likely that the current agreements contain materially different terms and that you must follow the basic franchise sales steps.

If the franchisee will be granted a renewal or an extension period without any other changes in the terms of original agreements, it is likely that you are not required to follow the basic franchise sales steps. This is true even if the franchisee will pay a fee for the renewal or extension period.

State Laws. The laws of the regulatory states generally are consistent with the FTC franchise rule, but some of the laws are silent on renewal and extension issues. If you think a state law might apply, check with the franchisor's lawyer or compliance manager about any special requirements. 

2. Modification of Franchise

FTC Franchise Rule. The FTC franchise rule does not require you to follow the basic franchise sales steps if the franchisor and an existing franchisee agree to modify their existing agreements, even if the modifications are material. It does not matter whether the modifications are sought by the franchisor or the franchisee.

State Laws. Most state laws are silent on the issue of modification, but some of the laws require the basic franchise sales steps or special disclosure procedures to be followed.

For example, the California law has very detailed special disclosure rules that must be followed if the franchisor seeks a material modification to a franchisee's existing agreement.

Similarly, the North Dakota law permits a material modification of an existing franchise agreement as an exemption to registration requirements if the franchisor discloses to each franchisee information about the specific sections of the franchise agreement that are proposed to be modified.

If you think a state law might apply, check with the franchisor's lawyer or compliance manager. 

 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 March 12, 2013 7:55 PM.

How Did this Clever Franchisee Beat the Franchisor's Non-Compete? was the previous entry in this blog.

Why Franchisors are at Risk & What They need to Do About It is the next entry in this blog.

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