You don’t decide to become a franchisor. The law decides for you.
Let someone open a shop under your brand. Tell them how to run it. Take a payment for the right. You just sold a franchise. Your contract can say “license agreement” in bold at the top. State and federal regulators read what a deal does, not what you named it.
That’s the first of the franchise law basics, and it’s the one that catches owners off guard. Once a deal meets the test, franchising rules apply whether you planned for them or not. Here is the rest of what stands between today and your first signed unit.
Three parts, and you’re a franchisor
The FTC Franchise Rule, at 16 C.F.R. Part 436, uses a three-part test. All three have to be present:
• A trademark. The other party gets the right to operate under your brand.
• Control or help. You hold significant control over how they run the business, or you give significant help with it. Think set hours, required vendors, an ops manual, a training program.
• A payment. They pay you, or promise to pay you, for the right.
Notice what is missing. Royalties. A territory. A big check. None of those are required. A small one-time fee, plus your brand, plus a rulebook. That is enough.
State definitions don’t all copy the federal one either. A deal that squeaks past the FTC Rule can still be a franchise under a state act. Which is why “we structured it as a license” is a sentence lawyers hear right before the hard part of a meeting.
The FDD is the disclosure. The franchise agreement is the deal.
They arrive stapled together, so owners treat them as one thing. They do different jobs.
The Franchise Disclosure Document informs. It holds 23 required Items plus exhibits. With everything attached, it tends to run 200 to 300 pages. The Items cover your history, your leaders and your fees. They also cover what it costs to open, what you owe franchisees in support, how many units you have, and your books.
The franchise agreement binds. It sits inside the FDD as an exhibit. It’s the paper both sides sign. Term. Territory. Royalty rate. Ad fund. Transfer rights, renewal, default, termination, and what the franchisee may do after they leave. Terms of 5 to 10 years are standard, usually with renewal rights for another 5 to 10. Settle those clauses before unit one. What you negotiate away once tends to become the system norm.
Item 19 is optional, and that choice follows you everywhere
An Item 19 financial performance representation is the one Item you’re allowed to leave out. Most first-time franchisors do.
Leaving it out has a cost. With no Item 19, nobody on your team may talk sales, margins or break-even with a prospect. Not in an email. Not at discovery day. A friendly aside like “our best store does about $700,000” counts the moment it leaves someone’s mouth.
Include an Item 19 and you may talk about those numbers. Only the disclosed ones, and every prospect gets the same figures.
The federal timing rules: 14 days, 7 days, one document
Three rules cause most of the compliance trouble for new franchisors.
14 days. A prospect must hold the finished FDD for at least 14 calendar days. That clock runs before they sign anything binding or pay you a dollar.
7 days. They need the franchise agreement, with the material terms filled in, at least 7 calendar days before signing.
One continuous document. The FDD goes out whole, in the order the rule sets. Nothing extra bundled in. No links or shortcuts added.
Count full days, and start counting the day after delivery. Both clocks exist for one reason. The buyer needs real time to read, ask questions, and hire their own lawyer.
State law is where budgets and timelines break
The federal rule sets the floor. States build on top of it, and they do not agree with each other.
About 13 to 14 states make you register. The count moves based on how you treat Michigan, South Dakota and Wisconsin, which take a filing without a full review. Roughly eight more states want a notice filing. The rest run on federal law alone.
In a registration state you file your FDD with a state agency, answer their comment letters, and wait for written approval before you can offer or sell. Staying compliant in a dozen states at once is its own job.
Plan on 30 to 90 days per state, longer if an examiner sends back questions. Then you renew every year.
Minnesota sits in the registration group, which hits every brand launching from the Twin Cities. Minnesota also makes you print your franchise registration number on ads aimed at prospects. New York has its own required legend. Run ads into a registration state before you are registered there and you have a problem. That holds even if your own state has no rules at all.
Some states go further. They govern the relationship itself, long after the sale. Under the Minnesota Franchise Act, at Minn. Stat. section 80C.14, you cannot end a franchise without good cause. You owe 90 days of written notice. That notice has to list every reason. The franchisee then gets 60 days to fix what the notice says is wrong. Fix it in time, and the termination is off.
The exemptions owners ask about
Three monetary exemptions sit in the federal rule. The FTC adjusts them for inflation every four years. These took effect July 12, 2024, and the next adjustment is due in 2028:
• The buyer pays less than $735 in the first six months
• The initial investment is at least $1,469,600, not counting unimproved land or any financing from you
• The buyer has been in business 5 years and has a net worth of at least $7,348,000
Other exemptions exist too, like the fractional franchise. Each comes with conditions. And a federal exemption doesn’t clear a state one. States write their own.
One more trap. Most state exemptions assume your brand name is federally registered. If your trademark isn’t registered with the USPTO, Connecticut, North Carolina, South Carolina and Maine flip from simple filings to full registrations.
What your calendar looks like after you issue
Becoming a franchisor adds recurring deadlines you now own.
• The annual update. Federal law gives you 120 days after your fiscal year end, so April 30 for a calendar-year company. Registration states layer their own renewal dates on top.
• The audit. Your FDD needs audited financials. There is relief for the first partial or full fiscal year of franchising. Some states still want an audited opening balance sheet. Start the audit about three months before your target issue date.
• Material change updates. An executive leaving, a fee going up, or a big lawsuit can force an update between annual cycles.
• Ad fund accounting. Collect a marketing fee and you have to track it. Spend it on the system. Report each year on where it went.
• Sales team training. Anyone who talks to prospects has to know what the FDD says, and what they may not promise.
Where these franchise law basics take you next
Franchising is a growth plan with a rulebook bolted to it. The owners who do well build every sales conversation on top of the FDD. The ones who struggle file it in a drawer.
Our Franchising page walks through the readiness questions, the parts of a franchise system, and what a launch costs. Ready to talk through your own timeline? Call EntrePartner at 612-431-9661, or reach us through the contact form. We build franchise systems for Minneapolis brands and for franchisors selling coast to coast.
Frequently asked questions
What is the FTC Franchise Rule?
It is the federal regulation at 16 C.F.R. Part 436 that governs franchise sales in all 50 states. It defines what counts as a franchise, sets the 23 required FDD Items, and fixes the 14-day disclosure timing.
What is the difference between an FDD and a franchise agreement?
The Franchise Disclosure Document discloses. It is the 23-Item package a prospect must receive before any sale. The franchise agreement is an exhibit inside it and is the contract both parties actually sign.
How many states require franchise registration?
Roughly 13 to 14, depending on how Michigan, South Dakota and Wisconsin are classified, since those take a filing without a full review. About eight more states require a notice or exemption filing. Minnesota is a registration state.
Can I license my business instead of franchising it?
Rarely. If the deal involves your trademark, a payment, and significant control over or assistance with the other party’s operations, it is a franchise regardless of the contract’s title. A limited set of exemptions exists and should be reviewed with counsel.
How often does an FDD have to be updated?
At least once a year, within 120 days of your fiscal year end, which is April 30 for a calendar-year company. Registration states set their own renewal dates, and a material change can force an amendment between annual cycles.
Still weighing whether franchising fits your business? Call 612-431-9661 and walk through it with us.
