Franchising – Federal (FDD) vs State Registrations

Franchising a business is not an inexpensive endeavour. One of the major contributors to its cost is the legal compliance required when franchising a business.  The Franchise Disclosure Document (FDD) which replaced the Uniform Franchise Offering Circular (UFOC) in July 2008 must follow the guidelines of the Federal Trade Commission.

The FDD is a lengthy document that describes the company history, the business, the terms, and the associated costs. The FDD contains a copy of the Franchise Agreement as an exhibit.  Customized FDDs and franchise agreements are effective during the recruiting phase and become tools to manage the future franchise relationship.

In addition to ther federal compliance requirements, some states have additional requirements. Complying with state laws can be cumbersome and costly. Following is a list of the states that require registrations and or filings grouped into three categories: Most time consuming and costly, less time consuming and less costly, and easy filing states.

Registration states are those states which require the submission of an application, a copy of the FDD and the payment of an annual fee. The application and FDD are reviewed by state employees upon submission. During the review process questions may arise and the state may require the FDD to be amended prior to approval of the application. The annual registration fees can be as high as $1,100 and  the application process may take up to four months or even longer.

Exemption states differentiate franchising from other Business Opportunities. These states have laws requiring  franchise companies to file an form that exempts them from paying the state’s Business Opportunity Fees. The exemption form must be filed before a franchise company can offer a franchise in an Exemption State. Filing for an exemption is typically a one-time event. However, some states such as Florida have an annual filing requirement. The fees associated with exemption filings are usually quite low, $100 or less.

1.  Most Time Consuming and Costly Registration States

• California
• Illinois
• Maryland
• New York
• Virginia

2.  Less Time Consuming and Less Costly Registration States

• Hawaii
• Indiana
• Michigan
• Minnesota
• North Dakota
• Rhode Island
• South Dakota
• Washington
• Wisconsin

3.  Easy Exemption States

• Connecticut
• Kentucky
• Texas
• Florida
• Nebraska
• Utah

When a franchise company does not have a federal trademark, the states of Georgia, Louisiana, Maine, North Carolina and South Carolina require they register an exemption filing with the state. This is filing is not needed otherwise; that is, a franchise company that has a federal trademark is not required to comply with any filings requirements in the states of GA, LA, NC, ME and SC.

All other states do not require any registration or filings at the state level and are thus termed Non Registration/ Non filing states. In these states compliance with the FDD is sufficient.