How to Understand the Penalties for Selling an Unregistered Franchise

In addition to the franchise laws set in place by the Federal Trade Commission, which require franchisors to submit a Uniform Franchise Offering Circular to each potential buyer, many states have their own regulations that must be followed. In some states, that includes registering the franchise accordingly and following all of the associated guidelines affecting the transfer and sale of such franchises.

Instructions

Difficulty: Moderate

1. Visit the FTC Web site for reliable information on states that require franchisors to register disclosure documents with their franchise office before selling their business opportunity (see Resources below). Here you'll find the name and location of each franchise office, plus information on whether or not you'll be required to file your disclosure document.
2. Go to the state agency's Web site to find specific information on how to register your franchise. Note relevant information, such as which documents are required for your particular state, and any initial questions that you'd like to ask your attorney.
3. Talk to other franchisors to ensure you understand the business you're getting into. Franchising your business is a large responsibility and should not be entered into blindly.
4. Ask other franchisors or your personal attorney for recommendations on local franchise lawyers. If you decide to franchise your business, you'll want a lawyer familiar with the laws and proceedings of franchising.
5. Work with your attorney and an accountant to create the necessary paperwork required to register your franchise. The first step should be to create a business plan, which can then be used to inspire the disclosure documents that need to be filed with the state.
6. Review your disclosure document and franchise agreement with both your attorney and accountant to ensure that they are complete, accurate and without loopholes. These documents aren't just designed to keep your franchise within the limits of the law—they're also essential in protecting you from future lawsuits.

Tips & Warnings

• Taking the time to learn the specific laws and penalties associated with selling an unregistered franchise in your state is very important. A good place to start is by contacting a reputable franchise attorney who is experienced with the process of buying and selling franchises in your state.
• Misunderstanding the laws of buying and selling franchises will not protect you from state penalties if you illegally franchise your business. Potential penalties for selling an unregistered franchise include injunctions, asset freezes, civil penalties, monetary redress and personal liability.