Manufacturing or Processing Plant—In this kind of franchise, the franchisor transmits to the franchisee the essential ingredients or formula for making a product to be manufactured or processed and marketed either at wholesale or retail in accordance with the franchisor's standards.
Regulations
A franchise business must follow both federal and state regulations adopted to guard against abuses in the franchisor-franchisee relationship.
At the federal level, franchising is regulated by the Federal Trade Commission ("FTC"), which requires franchisors to give an extensive disclosure document to prospective franchisees so that they can evaluate the financial and business risks associated with the business to be operated.
The FTC has recently changed the rule governing disclosure documents. It replaced the old document, the Uniform Franchise Offering Circular (UFOC), with a new document, the Franchise Disclosure Document (FDD). Beginning July 1, 2008, franchisors must use the FDD and comply with the Revised Franchise Rule. The amended Franchise Rule states what specific information must be disclosed. You can find the amended Rule in the Code of Federal Regulations, Volume 16, Part 436, 16 CFR § 436. The Franchise Rule Compliance Guide, which is designed to assist franchisors in complying with the amended Rule is available at the FTC's Web site.
The FTC also requires franchisors to provide prospective franchisees with a copy of the franchisor's current disclosure document at least 14 calendar days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale.
Many states have franchise laws that are similar to the federal law. These franchise laws attempt to level the playing field between franchisor and franchisee in order to prevent the abuses that can arise in the franchise relationship and to establish certain minimum rights of the parties.
Well-established and successful franchisors are usually unwilling to make significant changes to their standard franchise documents. Less established franchisors, needing to expand their business base, might be somewhat more flexible. In setting up a franchised business, third parties, such as landlords and lenders, may also be involved.
Because of the complexity and length of the franchise agreements and the added complexity of third-party arrangements, you should consult with a franchising attorney and accountant early in the process of considering or negotiating a franchise agreement.
Questions for Your Attorney
- What is a franchise?
- What advantages are there in becoming a franchisee rather than starting my own business?
- Which federal agency regulates franchises?