How to Craft a Franchise Compliance Program

Picture of Schuyler "Rocky" Reidel

Schuyler "Rocky" Reidel

Schuyler is the founder and managing attorney for Reidel Law Firm.

How to Craft a Franchise Compliance Program

Franchise compliance should be the top concern of any existing or potential franchisor. Many experienced business people jump into the franchise model without fully understanding the rules, regulations, and penalties for a poorly implemented franchise system. The franchise industry is very regulated compared to the typical business environment in the US and the pitfalls to the wary franchisor can be very devastating to a young franchise system. Steps involved in crafting the right franchise compliance program for your franchise system include: identifying the applicable laws and regulations to your system, the next step is to conduct an internal risk assessment to identify where the compliance weaknesses may be apparent, then you should develop a tailored compliance program and implement it.

Identifying the laws and regulatory regime relevant to your franchise model is the crucial first step that is typically best performed by an in-house or franchise attorney. The core regulation is the FTC’s Franchise Rule. After your franchise is FTC complaint, you will next need to confirm which state laws will be applicable. Many states have unique rules and special registration requirements that must be adhered to before any franchise offering is made within those states. States like California, Maryland, New York, and Illinois are some of the tougher states to maintain state compliance on top of your FTC compliance.

Also note that several states will require special changes or addenda to your FDD and FA. As you begin to offer franchise sales in more states the complexity of maintaining compliance in each, plus the FTC rules, multiply quickly. Outside of the typical franchise laws are many industry specific regulations that range from environmental to child care to food safety rules that may apply to your business. Compiling and articulating all of these relevant laws and regulations are essential to an effective compliance program.

The internal risk assessment should be an objective and thorough examination of how your franchise model operates and especially how you offer your franchise sales to prospective franchisees. It is critical to have the active support of your senior management to explore where the deficiencies are and how they can be remedied with the right compliance program. Some areas that will need to be explored for the risk assessment are: sales personnel, sales process, document retention, and proper management supervision. Sales personnel will need to fully understand the sales process, what they can and cannot say to prospective franchisees, and be prepared to properly document the sale. Each of these are essential to any compliance program and keeping your franchise system out of legal problems in the future.

After a thorough risk assessment your franchise consultant and franchise attorney can help craft the blueprint for your franchise compliance program to address the deficiencies and shortcomings of your process. You will likely need some training of your key sales and documentation personnel within your system. Sometimes this training is comprehensive to ensure that all those involved will have the tools and understanding to address compliance issues. Of course, no compliance program is complete without a continuing monitoring and reporting mechanism. Monitoring and reporting within the compliance program will keep the program up to date and ready to address any future deficiencies.

No one size fits all compliance program can protect every franchise system but building a comprehensive, tailored program for your franchise system can help dramatically reduce the risks associated with franchising. To learn more about how Reidel Law Firm can help your franchise system grow and minimize your risk call us today at +1(832)510-3292 or use the email button below.