What Is a Franchise?

A franchise in Texas is governed by the Texas Business Opportunity Act and many people know the likes of large franchise chains such as McDonald’s® and Chick-fil-A®. Texas defines a business opportunity as a sale or lease of more than $500 of products, equipment, supplies, or services that will be used by the purchaser for beginning a business in which the seller represents that the purchaser will make a profit in excess of the amount of the initial investment and the seller will assist buyer in finding a location to sell the products or provide the services, or provide marketing assistance, or will buy back products, or equipment from the buyer. 

Franchise Disclosures

All franchises in the United States are governed by both State and Federal Laws, and depending on the state you are in, will likely dictate the law that governs your franchise. Thus, when considering whether or not to franchise your business, you should be aware of the Federal Regulations put down by the Federal Trade Commission (FTC) and your specific State laws. 

The State of Texas requires disclosure of the business opportunity, or franchise, to the Secretary of State before you provide or even advertise a potential franchise business opportunity. However, most franchise offerings are exempt in the state of Texas as long as you comply with federal regulations regarding the Franchise Disclosure Document (FDD). The FTC requires that all potential franchisees be given an FDD at least 14 days before signing a binding agreement or making any payment towards the opportunity. 

Further, the FTC has set out the Franchise Rule, which lays out 23 requirements and disclosures that must be set forth in a proper FDD. The Federal Franchise Rule requires that Franchisors disclose all information pertaining to the Franchise including, but not limited to, Franchisor and Affiliates information, prior business experience, litigation, bankruptcy, Franchisee’s fees, restrictions and obligations, audited financial statements and contracts. This does not cover all of the requirements, but this gives you an idea of all the information required in order to make a franchise offering.

For more insights on Franchising & Franchise Agreements, see our Corporate & Commercial Overview and Industry Focused Legal Solutions pages.