Rules and Regulations of Working with Franchise Brokers

Imagine…a few years from now…you’re involved in due diligence, about to take-on a strategic capital infusion or sell your system at an xx multiple and…legal red flags arise…the deal comes to a halt…and your deal value is about to be impaired.

You need to build and fortify your legal foundation along with your franchise growth strategy.

First up on building your legal foundation, understanding the role of a “franchise seller” and your legal relationship with franchise brokers:

• The Guide – Visit www.FranchiseBrokerCompliance.com for a complete guide on franchisor/broker legal relationships. (Always be sure to verify and review with your lawyer).
• Who is a Franchise Seller? – If you’re a franchisor it’s you, your management team (See FDD Item 2), your agents, and representatives, including franchise brokers. A franchise seller is anyone that “…offers for sale, sells, or arranges for the sales of a franchise…”
• You Need to Disclose Your Franchise Sellers – In addition to your Item 2 disclosures, within your FDD receipt page, you need to disclose involved franchise sellers. This includes brokers and members of a franchise sales organization that you may be working with.
• Avoid Unauthorized Financial Performance Representations – You must limit any and all financial performance representations to the information disclosed in Item 19 of your FDD. When working with franchise brokers, broker organizations, and franchise sellers, you must avoid backdoor unauthorized financial performance representations. You cannot avoid liability or accountability through indirect disclosures through others, including directed and coordinated communications from a select franchisee. If you are a franchise broker, you need to understand that as a franchise seller that you have an affirmative obligation to advice a franchisee candidate if you believe that a financial performance representation is unauthorized, inaccurate, or outdated.

All of this is manageable…but be cautious. Little one-time mistakes have a way of multiplying and forming patterns and practices that will be easy to spot 5 years from now and detrimental to your deal value.