Franchise Rule Disclosure Compliance Obligations – Who’s Responsible?

Business Question

Who is Responsible For Furnishing Disclosure Documents?

Franchisors (including any subfranchisors) are responsible for furnishing disclosure documents to each prospective franchisee. A “prospective franchisee” is “any person (including any agent, representative, or employee) who approaches or is approached by a franchise seller to discuss the possible establishment of a franchise relationship.” Accordingly, franchisors do not have to furnish copies of their disclosure documents to members of the general public – such as journalists, academicians, or those surfing online who hit upon a franchisor’s website. A person must have some bona fide interest in becoming a franchisee, not mere curiosity. At the same time, franchisors may comply with the obligation to furnish disclosure documents to “prospective franchisees” though an agent or representative of a prospective franchisee, such as an attorney. In the case of a corporate prospect, disclosures can be furnished to a company officer.

What Happens When an Existing Franchisee Sells His or Her Outlet?

A transferee – a person who purchases an existing franchise directly from the franchisee who owns it, without any significant contact with the franchisor – is not a prospective franchisee. Even if the franchisor has, and exercises, the right to approve or disapprove a subsequent sale (transfer) of a franchised unit, the transferee will not be entitled to receive disclosures unless the franchisor plays some more significant role in the sale. For example, if the franchisor provides financial performance information to the prospective transferee, the franchisor would be required to provide the transferee with its disclosure document.

What Happens When an Existing Franchisee Purchases Additional Outlets?

A franchisor is not required to provide a disclosure document to a franchisee exercising a right under the franchise agreement to establish any new outlets (as opposed to selling outlets to others), nor to a franchisee who chooses to keep its existing outlet post-term either by extending its present franchise agreement or by entering into a new agreement, unless the new relationship is under terms and conditions materially different from the present agreement.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.

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