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Franchising can be a great way to build a business. However, many owners do not realize that franchise laws are not the same across the board. You might assume that federal regulations cover everything. But state law usually calls the shot when it comes to real-world details. These include disclosures, registrations, and legal protections. Thus, you should understand how the legal landscape shifts from one place to another if you are thinking of opening a franchise or expanding into another state. Here’s what you should know about state laws that govern franchising in the United States:
Not All States Regulate Franchises the Same Way
There is no single national franchise law that governs all aspects of franchising in the United States. The Federal Trade Commission (FTC) has the Franchise Rule that requires franchisors to provide a Franchise Disclosure Document (FDD). But this is just the beginning.
Then, states get to make their own rules. Currently, 14 registration states require franchisors to register their FDDs before they can offer or sell franchises within the state. This means more paperwork, more scrutiny, and changes to the standard documents. Also, there are business opportunity states that have separate requirements. Plus, relationship laws govern how franchisors and franchisees can end or renew agreements.
Registration States and Why They Matter
States such as California, New York, Illinois, and Minnesota require franchisors to register their disclosure documents with a state agency. These agencies often review the documents for accuracy, fairness, and compliance with state-specific rules.
This might sound like a headache for franchisors, but it can be a safety net for franchisees. The law might offer you more protection in terms of transparency and rights if you are in one of these states. For example, California might require clearer language around termination clauses while Minnesota might regulate how disputes are resolved. You may see a version of the FDD that has been customized to comply with local rules if you are buying a franchise in a registration state. This version could be more favorable to you than the standard federal one.
Non-Registration States Are Not Always Simpler
Just because a state does not require FDD registration does not mean you are off the hook. The franchisor still has to comply with the FTC’s Franchise Rule in non-registration states. However, there is less oversight at the local level. This means franchisees in those states may have fewer legal protections or fewer ways to push back if something goes wrong.
In addition, some non-registration states still require franchisors to file a notice or pay a fee to do business. So, there are still hoops to jump through although it might seem easier.
State Relationship Laws Can Make a Big Difference
Some states go beyond just regulating how franchises are sold. They regulate how the relationship works after the contract is signed. These are known as franchise relationship laws.
States such as Wisconsin, Indiana, and Arkansas have laws that restrict how and when a franchisor can terminate or refuse to renew a franchise. Others may require good cause for termination or mandate advance notice periods. In some cases, the laws even impact how disputes are handled including where they can be litigated or whether arbitration is required.
You might have more leverage in negotiations or disputes if you are operating in a state with strong relationship laws. If not, you could be at a disadvantage if the relationship ever turns sour.
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