Franchising in the US and Florida
Franchising occurs when one company (the franchisee) gains the rights to use the brands and business model of another company (the franchisor) for a fixed period of time for an agreed fee. The name of the business that is formed by the franchisee is called a franchise.
For the franchisor, the franchise is a way to share the risk involved with expanding geographically since franchisees make a significant investment and assume the daily business liabilities of the new location being created. To the franchisee, the franchise represents a stake in the franchisor’s company, making the franchisee more invested in the business’ outcome than they would be as an employee.
Franchises are a popular tool for running a business in the US. According to the International Franchise Association some 44% of all businesses in the country are run by franchisees.
Franchise opportunities are governed by a combination of federal and state laws. Federal government as well as state regulators outline the procedures to register, make offers for and sell franchises, and define the legal relationship between franchisors and franchisees.
The Federal Franchise Rule governs all franchise opportunities across all fifty states and US territories. The Federal Trade Commission (FTC) enforces the Federal Franchise Rule with the franchise disclosure document being the main regulatory vehicle. A franchise disclosure document (FDD) sometimes also called a Uniform Franchise Offering Circular (UFOC) must be presented from the franchisor to the franchisee prior to the official offer of any franchise opportunity.
The FDD is a lengthy (often over 500 pages) and detailed legal document that generally requires audited financial statements from the franchisor in predesignated format. It must include such data as the contact details of current franchisees in the licensed territory and estimate of total franchise revenues and some indication of how much profit each franchisor makes in that territory.
While this federally required document is essential for all franchise opportunities in the US, it is not the only document that must be drafted as part of the franchising process. Registry of franchises and additional filing requirements for information are required at state level. In fact the states are the primary collectors of data on franchising companies and separately enforce laws and regulations regarding franchises and their proliferation in their given jurisdictions.
While minimum standards for a franchisor’s disclosure are set by the Federal Franchise Rule and enforced by the FTC, individual states can augment the federal law with franchise statutes and further requirements. In Florida, supplemental franchise statutes relate to the way each franchisor registers and discloses their obligations and govern the relationships between franchisors and franchisees.
“…some 44% of all businesses in the country are run by franchisees.”
The Florida Franchise Act (“FFA”), Florida Statute § 817.416.2 sets clear guidelines for the establishment of franchises and distributorships in Florida. These statutory guidelines however, are not the sum total of all Florida State regulations that govern franchisor/franchisee business relationships. It is essential that franchisors avoid penalties for making misrepresentations by engaging an experienced Florida business attorney that can take into consideration the many other laws that apply in place of or in addition to the FFA.
Terms, Fees and Contracts
The duration of a franchise agreement typically ranges from from five to thirty years, with cancellation or termination clauses built into the contract. The geographic range includes, usually, a specific territory or geographical area surrounding the franchise’s address. A single franchisee may manage several franchises or invest in additional franchises after successfully managing one of them. It is important to note that the franchisee does not buy a franchise but rents or leases the opportunity under a temporary license.
Franchisees make three important payments to franchisors: (a) a royalty fee for use of the franchisor’s trademark, (b) compensation for the franchisor’s training and advisory services, and (c) an agreed percentage of the individual franchise’s sales. Usually, these three fees are paid as part of a management fee. An additional fee for disclosure covers the franchisors legal and administrative costs of providing regulatory documentation. An additional fee is usually paid to the franchisor for marketing. These fees typically add up to a little less than 10% of the gross revenue of the franchise.
Where the franchisor has many partners, the agreement may take the shape of a business format franchise – an agreement that is identical for all franchisees.
South Florida Law
Opening a franchise or offering a franchise opportunity is a highly regulated and document intensive process. It is essential that any business involved seeks experienced legal counsel to ensure that their best interests are upheld in the process. South Florida law is a boutique-sized business law firm with the resources of a large law firm. We actively serve each client with partner-level attention to detail that larger firms are unable to provide. If you are a potential franchisor or franchisee and require an expert in Florida franchise law, contact South Florida Law today via our contact form or by calling us on (954) 900-8885.