Legal Requirements of an Existing Franchisee Sale of His or Her Outlet; Purchase of Additional Outlets; Extending the Term of an Existing Franchise?

Written by Raymond McKenzie on April 28th, 2011

An existing franchisee that sells his or her franchised business directly to a third party, without any significant contact with the franchisor does not need to abide by the federal franchise disclosure law, or any state franchise registration or disclosure law.

 The FTC Franchise Rule states, directly from the FTC website found at http://www.ftc.gov/bcp/edu/pubs/business/franchise/bus70.pdf

“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.”

 Likewise, in the case of an existing franchisee that purchases one or more additional outlets from the same franchisor for the same brand, the franchisor is not required to provide a disclosure document to such a franchisee exercising a right under the franchise agreement to establish any new outlets.

Finally, the franchisor is not required to provide a disclosure document 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.  In the case of a materially different franchise agreement, the franchisor must abide by state and federal franchise registration and disclosure laws.

 

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