LEGAL MINEFIELD OF EXPLOSIVE GROWTH: How to protect a franchise brand as the number of units increases.

Author:Barber, Jonathan
 
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It has becoming increasingly common to see emerging franchisors sell 50, 100, 200 or even more franchises in a year. Their concept is unique, their sales team is aggressive and their leadership usually gathers a cult following. Some of these franchisors work with franchise developers and utilize various franchise broker groups. Others handle their sales in-house and source all their leads organically.

There&'s no specific formula for franchise growth as there are many ways to sell a large volume of franchises. However, franchisors experiencing explosive growth can find themselves in a legal minefield where one small step can spell disaster. Below are some common pitfalls and best legal practices for avoiding them.

DISCLOSURE COMPLIANCE

A franchisor&'s first few sales are usually "rough" from a legal perspective. If they worked with a franchise attorney to prepare their franchise disclosure document (FDD), they should have learned the basic disclosure rules. If the franchisor doesn&'t have a system for tracking disclosures, they could run afoul of the "14-day rule." Should they sell a franchise before 14 days have passed since disclosure, that franchisee could have serious state and federal claims, including "rescission." Rescission and fines can effectively cripple a new franchise system before it ever gets off the ground.

Shockingly, many franchisees are given the wrong FDD, a Microsoft Word version of the FDD, a redlined version of the FDD or never even given an FDD! These mishaps are rarely intentional. They&'re usually the result of the franchisor&'s sales team simply not knowing the rules.

Today, there are software and systems available to franchisors for disclosure compliance. Many franchise lawyers will also handle electronic disclosure for their franchisor clients. At a minimum, franchisors should attend the IFA Emerging Franchisor Conference and other IFA events where they can learn these basics. Franchisors should also consider enrolling their sales or development teams in the IFA Certified Franchise Executive program, which provides extensive compliance training. The best practice is to learn the basics of franchise disclosure and to attend continuing education on the topic since these laws are subject to change.

PROPER DOCUMENTATION

With explosive franchise sales comes a ton of documentation. FDD receipts, franchise agreements, development agreements and addenda to those agreements are some of the key documents that should be...

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