Sometimes a franchisor wants to pay a franchisee for helping sell a franchise.

But there are many potential problems, here. I want to point out just one and its solution.

Before furnishing an FDD to a prospect, you must confirm that both receipts at the end of the FDD identify all "franchise sellers" who have been or will be involved in offering the franchise to the prospect.

The receipts must state the franchise sellers' names, business addresses and business telephone numbers. Or, the receipts may refer to an exhibit containing the franchise sellers' names and contact information.

The meaning of the term "franchise sellers" is narrow for this purpose. The FTC wants the receipts to identify the persons who have been or will be dealing directly with the prospect, including key officers or employees and any broker. The FTC does not want the receipts to identify all persons who arguably might be franchise sellers in a broad sense, or to cross-reference lists of brokers or other persons who might sometimes represent the franchisor.

A few key persons who are involved in all or most franchise offers and sales for the franchisor may be pre-identified on all receipts. Other persons, such as brokers who deal occasionally with the franchisor's prospects, must be identified in typing or handwriting on the receipts, on a prospect-by-prospect basis.

Any person who, under a contract, will receive a sales commission or quota credit if a franchise is sold to the prospect must be identified.

This may be difficult to keep track of. What should be done if a franchise seller not identified on the receipts becomes involved with the prospect after disclosure has occurred?

When this happens, you or the franchisor must revise the dated and signed receipt previously obtained from the prospect so that the receipt identifies the new franchise seller, and must furnish a copy of the revised receipt to the prospect.

Revising the receipt may involve merely making a copy of the receipt with the new franchise seller's business card shown on the receipt or with information about the new franchise seller handwritten on the receipt. You and the franchisor are not required to have the prospect re-date or re-sign the receipt.

The cost of violating the FTC rule is $11,000 per occurrence per day.

The are a number of other risks when paying for franchisees to validate the franchisor's concept. Be sure to review your entire selling process with a franchise attorney with compliance expertise.

(This was the fourth post in a series of 11 posts on making compliant franchise sales.)

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

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Authors

Archives

Search for Articles

Follow Us