Are Franchises Regulated by the Government?
A question posed by many prospective franchisees is whether franchising is regulated by the government. While the federal government does not regulate franchising, it does require franchisors to disclose information to franchise buyers with the information they need to know before buying a franchises.
FTC requirements
The Federal Trade Commission (FTC) requires all franchisors operating in the United States to abide by the FTC's Franchise Rule. This is a federal regulation which requires franchisors to prepare an extensive disclosure document called the Franchise Disclosure Document (FDD) and to give a copy to any prospective franchise purchaser before he or she buys a franchise.
The FDD consists of many different categories about the franchise such as required fees, basic investment, bankruptcy and litigation history (including any felony convictions and civil judgments), a list of current and former former franchisees, a financial statement of the franchisor and earnings claims (if the company makes them) and the franchisor's executives, as well as their past experience.
State requirements
In addition to FTC requirements, 14 states require franchise companies to file or register their franchise offerings with a state agency. These include: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.
If you’re based in a state that requires this, check with your state office to confirm that the company is registered to sell franchises in your state. (Oregon also requires franchisors to provide pre-sale disclosures to potential buyers, but does not require the FDDs to be filed with the state.)
More articles from AllBusiness.com:
- Startups: What Business Permits and Licenses Do You Need?
- Franchise Research Basics: How to Compare Similar Opportunities
- What Is the Franchise Disclosure Document?
- 40 Reasons to Buy a Franchise
Other states regulate the offering and sale of "business opportunities," which may include the offering of a franchise under the state's definition of a "business opportunity" through so-called "business opportunity laws." These include: Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, Washington, and Wisconsin.
Other business requirements
The government, both at the state and federal levels, regulates all businesses. Before you can open for business you will have to find out what licenses and/or permits are required for your business. These include a business license from your city's business license department; a fire department permit if your business uses any flammable materials; air and water pollution control permits if you burn any materials, expel anything into the sewers or waterways, or use products that emit gas.
In addition you may need a sign permit from your city; county permits; state licenses for certain occupations like auto mechanics, realtors, barbers and cosmetologists and educators; sales tax licenses from your state department and health department permits.
RELATED: Buying a Franchise vs. an Independent Business: What Are the Pros and Cons?
