Kaufmann Gildin & Robbins LLPKaufmann Gildin & Robbins LLP2026-09-11T20:53:14Zhttps://www.kaufmanngildin.com/feed/atom/WordPress/wp-content/uploads/sites/1404180/2023/10/cropped-Kaufman-Gildin-site-icon-32x32.pngOn Behalf of Kaufmann Gildin & Robbins<![CDATA[The Noncompete Landscape Is Shifting: Is Your Franchise Agreement Ready?]]>https://www.kaufmanngildin.com/?p=513392026-09-11T20:45:59Z2026-09-11T20:45:59ZFor decades, franchisors have relied on post-termination restrictive covenants against competition as an important tool for protecting their brands, confidential information, customer relationships, and franchise systems after a franchisee leaves the system. But the legal landscape surrounding these provisions is changing rapidly, with courts and state legislatures increasingly scrutinizing - - and, in some jurisdictions, restricting - - the use of post-termination noncompete provisions.
California has long maintained a strong public policy against restraints on trade, while Virginia recently enacted legislation expressly prohibiting certain post-termination noncompete provisions in franchise agreements. These developments should prompt franchisors to take a fresh look at their franchise agreements - - not simply determine whether a particular noncompete remains enforceable, but to consider whether the agreement as a whole adequately protects the franchisor when the franchise relationship ends.
Noncompete Restrictions Do Not Mean the End of Post-Termination Protections
Traditionally, franchisors have used post-termination noncompete provisions to prevent former franchisees from leveraging the knowledge, goodwill, customer relationships, and operational insight gained through the franchise relationship to compete with the franchisor. But preventing competition and protecting the franchisor’s legitimate franchise system interests are not necessarily the same objective, particularly as the enforceability of post-termination noncompetes comes under increasing scrutiny.Even when a franchisor cannot prevent a former franchisee from competing, it continues to have legitimate interests to protect - - including its trademarks, trade dress, confidential information, proprietary systems, customer information, digital assets and other components of its franchise system. The answer is not to simply replace a noncompete with another broad restriction or rely on a single restrictive covenant to protect these distinct interests. Instead, franchisors should assess whether their franchise agreements are structured as a coordinated framework addressing the protection, use and disposition of these assets and relationships when the franchise relationship ends.
California Has Long Been a Warning Sign
California has long served as a cautionary example for franchisors relying on post-termination restrictions. California Business and Professions Code §16600 broadly provides that contracts restraining a person from engaging in lawful profession, trade, or business are void, subject to specified exceptions. While California courts have recognized distinctions between franchise relationships and traditional employment relationships when applying these restrictions on trade, and there may be exceptions in some situations, California’s longstanding public policy against restrictive covenants remains an important consideration for franchisors. For franchisors operating nationwide, California demonstrates why a provision that may be enforceable in one state cannot be assumed to be enforceable in another. It also illustrates the importance of structuring franchise agreements around the franchisor’s legitimate interests rather than simply relying on broad restrictions against competition.
Virginia Changes the Drafting Equation
Virginia’s 2026 legislation takes the issue a step further by expressly addressing the inclusion of post-termination noncompetes in franchise agreements. Effective July 1, 2026, Virginia’s Retail Franchising Act generally prohibits franchisors from offering or entering into franchise agreements that restrict a franchisee’s ability to engage in the retail business of offering, selling, or distributing goods or services at retail after the termination or expiration of the franchise agreement. The statute contains a narrow exception for certain voluntary franchise sales, under which a post-sale noncompete may be imposed for a period of up to two years. For franchisors, the implications extend beyond simply removing the noncompete from their Virginia form (or excluding/narrowing it via a Virginia state-specific addendum). The franchisor should consider how the remainder of the agreement addresses the legitimate interests that the noncompete historically helped to protect.
Rethinking the Franchise Agreement’s Post-Termination Framework
When a traditional post-termination noncompete is unavailable, franchisors should resist the temptation to recreate the same restriction through a series of increasingly expansive provisions. Instead, franchisors should take a step back and evaluate whether their franchise agreements are structured as an integrated framework for protecting the franchisor’s legitimate interests during and after the franchise relationship. Among other things, franchisors should consider whether their agreements appropriately address:
Debranding and deidentification: What must the franchisee do immediately after termination to remove trademarks, signage, trade dress and other brand identifiers?
Confidential and proprietary information: What information does the franchisor legitimately need to protect, and are those protections appropriately defined?
Customer and business information: What rights does the franchisor have with respect to customer information and data generated through the franchise system?
Digital assets: Who controls websites, domain names, social media accounts, telephone numbers, online listings and other digital assets following termination?
Return and destruction obligations: How are proprietary materials returned, deleted or disabled?
Transition obligations: Does the agreement provide a practical mechanism for an orderly transition following termination?
Transfers and continuity of protections: Does the agreement preserve the franchisor’s legitimate post-termination protections when a franchise is transferred, including by clearly addressing which obligations and protections carry forward and which apply upon a subsequent termination?
Survival provisions: Which obligations continue after the franchise agreement ends, and for how long?
The objective should not be to disguise an impermissible noncompete as another contractual provision, Rather, each provision should serve a legitimate and identifiable purpose and operate as a part of a coherent framework for protecting the franchise system.
Looking Beyond the Noncompete
As states increasingly adopt different approaches to restrictive covenants, franchisors should consider whether their existing agreements and state-specific addenda adequately address those differences. This does not necessarily mean that franchisors need entirely separate agreements for every state. It does, however, mean that franchisors should no longer assume that a provision in a national form will be appropriate - - or enforceable - - in every jurisdiction. The changing noncompete landscape therefore presents an opportunity to take a broader view of the franchise agreement: What is the franchisor actually trying to protect and does the agreement provide an effective and legally appropriate framework for doing so?The question is no longer whether a franchisor can stop a former franchisee from competing. The more important question is whether the franchise agreement has been thoughtfully designed to protect the franchisor’s legitimate interests when the franchise relationship ends.
Longer regulator enforcement window. The Maryland Securities Commissioner's authority to pursue enforcement actions for violations of the Maryland Franchise Law now extends from three years after a violation to five years after the violation occurs (§14-210(c)). Franchisors should expect a longer look-back period for state enforcement exposure.
Scope clarification for Section 14-227. A new §14-227(a) clarifies that this section — which addresses franchisee rights (including rights to sue their franchisor in certain situations) — applies only to a franchisee who resides in Maryland, or to a franchised business that operates or will operate in the state. The remaining subsections of the former §14-227 are renumbered accordingly.
Longer private civil action window. The limitations period for a franchisee to bring a private civil action changes from three years after the grant of the franchise to the earlier of: (i) four years after the franchise is granted, or (ii) two years after the franchise opened to the public (§14-227(f)). This is a substantive change that directly affects franchise agreement and disclosure document language, discussed below.
New trade-association / free-association rights. Amended §14-233 (with the former §14-233 renumbered to §14-234) now guarantees franchisees the right to join a trade association made up of other franchisees of the same brand and to participate in it for any lawful purpose. Franchisors — and their officers, agents, or employees — are prohibited from directly or indirectly restricting or inhibiting that right, or otherwise prohibiting free association among franchisees. Critically, the amendment creates a private cause of action for violations, meaning franchisee associations (or individual franchisees) can sue over restrictive conduct or contract language that runs afoul of this provision.
Statutory Fast-Track renewal program. The Franchise Disclosure Document (FDD) Renewal Fast-Track Review Pilot Program, which the Securities Division in Maryland ran informally during the 2026 renewal season, is now formally codified (§14-219.1). Franchisors renewing in Maryland should confirm whether they qualify for and can meet the deadlines (including audited financial statement deadlines) for expedited review, and confer with their franchise counsel as to whether such expedited review is likely to make much difference for them in their specific case.
How the Securities Division Will Handle the Transition
Importantly, the Maryland Securities Division is not requiring registered franchisors to immediately amend their filings on October 1, 2026 solely because of these statutory changes. Under the Interpretive Opinion/No-Action Position appended to the Notice recently issued by the Maryland Securities Division, a franchisor may continue offering and selling franchises in Maryland after the effective date without filing a post-effective amendment — and without pausing sales — provided that the FDD and related agreements (or addenda) actually being used with prospective Maryland franchisees have already been updated to comply with the new amendments. Formal review by the Division of the updated language will happen at the franchisor's next renewal or amendment filing, whichever comes first.In short: the filing deadline is flexible, but the substantive compliance deadline is not. A franchisor cannot keep using pre-amendment disclosure and agreement language in live Maryland offers past October 1, 2026, even if its registration itself is not due for renewal.
What Franchisors Should Do Now
Update the Maryland statute-of-limitations disclosure / addendum language. This is the one change the Notice specifically flags as requiring conforming document language. Franchise agreements, area development agreements, and/or the Maryland-specific state-law addenda in the franchisor’s FDD should be revised to state:"Any claims arising under the Maryland Franchise Registration and Disclosure Law must be brought by the earlier of: (i) four (4) years after the franchise is granted; or (ii) two (2) years after the date the franchise opened to the public."Such change becomes effective October 1, 2026, so framing the above disclosure in a manner so as to be clear about the time period when it begins to apply may be advisable.Review non-solicitation, non-disparagement, and communication-restriction provisions. With the new trade-association and free-association protections in §14-233, franchisors should scrutinize any contract language, franchisee-communication policies, or informal practices that could be read as discouraging franchisees from joining or participating in a franchisee association. Given the new private right of action, this is a real litigation risk area, not just a disclosure formality. For many franchisors this may not present any issue or any need to change documents, policies or practices, but the question should be examined by each franchisor in the context of their particular system.Confirm your enforcement-exposure runway internally. The extended five-year Securities Commissioner enforcement window does not require document changes, but compliance, legal, and franchise development teams should factor the longer look-back period into recordkeeping and internal compliance review practices.Time your Maryland FDD update to your renewal cycle — but do not wait past October 1 for the substantive language. Because the Maryland Securities Division states that it will not force an off-cycle amendment to address these changes, franchisors can bundle these changes into their next scheduled renewal or amendment to their FDD filed with Maryland. However, the underlying agreement / Maryland addendum language must already reflect the new limitations period for any Maryland offer or sale made on or after October 1, 2026.Evaluate Fast-Track eligibility for your next renewal. With the pilot program now a permanent statutory feature, franchisors renewing after October 1 should ask counsel whether their filing qualifies for expedited review, whether participating in the “fast track” program makes sense and is likely to make much difference for them, and plan renewal timing accordingly.
Bottom Line
Maryland's amendments extend both regulatory and private enforcement windows, add new franchisee association protections with real teeth (a private cause of action), and formalize a faster renewal track — all without forcing an immediate registration amendment. The practical trap is the gap between the filing grace period and the substantive compliance deadline: franchisors need updated Maryland addendum and agreement language in place for any offer or sale on or after October 1, 2026, even if their next formal renewal is months away. Franchise counsel should audit Maryland-facing FDDs and agreements now to avoid using stale disclosure language in the interim.This post is a general summary of recent legal developments and does not constitute legal advice. Franchisors should consult counsel regarding their specific Maryland compliance obligations. If you have questions about this or any other franchise matters, please call David B. Ramsey, Esq. at [nap_phone id="LOCAL-REGULAR-NUMBER-1"] or email him at dramsey@kaufmanngildin.com. ]]>On Behalf of Kaufmann Gildin & Robbins<![CDATA[Court Halts Former Franchisee’s Competing Restaurant: Key Lessons for Franchisors]]>https://www.kaufmanngildin.com/?p=513282026-08-17T21:47:22Z2026-08-17T21:47:22ZKaufmann Gildin & Robbins LLP recently secured a significant victory for its client, Bonchon Franchise LLC, one of the nation’s leading Korean fried chicken franchise systems. On May 28, 2026, Judge Colleen McMahon of the United States District Court for the Southern District of New York granted Bonchon’s motion for a preliminary injunction — halting a former franchisee’s competing restaurant and ordering immediate compliance with post-term non-competition and confidentiality obligations. The ruling in Bonchon Franchise LLC v. Xiao Cheng Zhou et al., No. 26-cv-3973 (S.D.N.Y.), is a strong reminder that franchise covenants not to compete carry real teeth, and that franchisors who move decisively can obtain swift judicial relief.
Background: A Franchisee Who Didn’t Miss a Beat
Mr. Xiao Cheng Zhou operated a franchised Bonchon restaurant at 170 College Street in New Haven, Connecticut under a 2015 Franchise Agreement. The ten-year term expired on October 30, 2025. The Complaint alleged that Mr. Zhou closed the Bonchon location on October 29 — one day early — and promptly opened a new restaurant called “MAMA SHIM” at the exact same address. According to the Complaint, MAMA SHIM’s menu mirrored what Mr. Zhou had been serving as a Bonchon franchisee: Korean style fried chicken, complementary appetizers, side dishes, and beverages.The Franchise Agreement’s post-term covenant prohibited Mr. Zhou, his spouse, and any entity he controlled from engaging in a Competitive Business — defined broadly as any business offering products or services authorized for sale under the Bonchon system — within ten miles of the former location for two years following expiration. Mr. Zhou had also signed a separate Confidentiality/Non-Competition Agreement reinforcing those obligations. Despite having received the moving papers and contacted Bonchon’s counsel, neither Mr. Zhou, his wife Eileen Zhou, nor their entity Stamford Brother, LLC appeared in court or opposed the motion.
How Kaufmann Gildin & Robbins Secured the Win
Our team filed suit on May 13, 2026 and moved for a preliminary injunction the same day. We successfully demonstrated each of the required elements: (1) a likelihood of success on the merits, based on the unambiguous covenant language and the undisputed fact that MAMA SHIM was operating in direct competition with Bonchon’s system; (2) irreparable harm, supported in part by the franchisee’s own contractual acknowledgment in Section 12.04 of the Franchise Agreement that violations of the non-compete would cause irreparable injury for which no adequate legal remedy exists; and (3) that the balance of hardships and the public interest favored relief. As a result, the Court issued a preliminary injunction enforcing the non-compete provisions of the Franchise Agreement.The Court also extended the injunction to Mrs. Zhou and the corporate entity Stamford Brother, LLC — neither of whom signed the franchise agreements — by applying the well-established principle that non-signatories “closely related” to a dispute may be bound by forum selection clauses and the obligations those agreements impose. The ruling confirms that franchisors can and should draft their non-compete provisions to expressly cover spouses and affiliated entities, and that courts will enforce that language.The injunction runs through October 30, 2027, or the final resolution of the litigation — whichever comes first — and prohibits defendants from operating MAMA SHIM or any competing restaurant within the ten-mile radius depicted in the map attached to the Court’s order. Defendants were also ordered to immediately return all of Bonchon’s confidential information, including the Operations Manual.After being served with the Order of Preliminary Injunction, Defendants retained counsel and provided Bonchon with evidence that they sold the Restaurant and were not operating it in violation of the Order. Having received a sworn statement of compliance with the Order, Bonchon voluntarily dismissed the action, without prejudice.
Implications for Franchisors
This case highlights several practical lessons for franchisors considering or already dealing with post-term competition from former franchisees:
Draft broadly and specifically. Define “Competitive Business” to capture any product or service authorized under your system, not just direct brand lookalikes. Cover the franchisee, their spouse, and any entity they control.
Include a contractual irreparable harm acknowledgment. Provisions like Section 12.04 in the Bonchon agreement — where the franchisee acknowledges violations will cause irreparable injury and that no adequate legal remedy exists — are valuable tools when seeking emergency injunctive relief.
Act quickly. From filing to hearing took just two weeks in this case. The faster a franchisor moves, the sooner the bleeding stops.
Use a forum selection clause. Mr. Zhou had agreed to venue in the Southern District of New York, enabling Bonchon to litigate in a forum of its choosing even though the restaurant was in Connecticut.
A Note for Franchisees
This decision is equally instructive for franchisees. Post-term non-compete obligations are real, and courts take them seriously. Opening a competing restaurant at the same address, with the same menu, the day after a franchise expires is unlikely to be treated as a close call. Franchisees who are approaching the end of their term — or who are contemplating a business pivot — should seek legal counsel well in advance to understand what restrictions apply and for how long.
At its core, the American Franchise Act would establish that a franchisor and franchisee are separate and independent employers unless the franchisor both possesses andexercises substantial, direct, and immediate control over essential terms and conditions of employment. Those employment-related factors generally include decisions involving hiring, termination, discipline, supervision, direction, compensation, benefits, and work schedules. The proposed legislation is intended to draw a clear distinction between legitimate franchise system oversight and actual control over a franchisee’s employment decisions.That distinction is fundamental to the franchise business model. Franchisors rely on systemwide operational standards to protect their trademarks, preserve brand consistency, and ensure that customers receive a uniform experience across franchised locations. To achieve these objectives, franchisors routinely establish brand standards governing the use of trademarks, operating manuals, product specifications, technology platforms, training programs, marketing and advertising initiatives, customer service expectations, cleanliness requirements, and periodic brand-compliance audits, among other things. The Act is designed to recognize that these types of brand protection measures, standing alone, do not transform a franchisor into the employer of a franchisee’s employees.At the same time, if a franchisor regularly and meaningfully controls core employment matters—such as making hiring decisions, setting wage rates, approving terminations, directing day-to-day supervision, or controlling employee schedules—the franchisor could still be deemed a joint employer. In that sense, the proposed legislation does not immunize franchisors from joint-employment exposure. Instead, it attempts to define the line between protecting a franchise brand and controlling a franchisee’s employees.
Why the Joint-Employer Standard Matters
The franchise relationship occupies a unique space in commercial law. Franchisees operate local businesses under a licensed brand, but they are not branch offices of the franchisor. They typically sign leases, employ staff, manage payroll, purchase supplies, and make day-to-day operational decisions. Franchisors, meanwhile, protect systemwide goodwill by setting the standards that customers associate with the brand.A broad or ambiguous joint-employer rule can pressure franchisors to reduce support to franchisees for fear that training, guidance, technology, compliance assistance, or operational recommendations could be characterized as evidence of employment control. That result can be counterproductive. Franchisees often choose franchising precisely because they want access to a proven system, brand resources, operational guidance, and ongoing support. If franchisors pull back from those functions, franchisees may lose tools that help them compete and grow.At the same time, employee protections remain a critical consideration. Workers should not lose rights simply because an employer operates within a franchised network or system. The legal question is who has actual authority over the employment terms at issue. The Act attempts to preserve that accountability by focusing on direct and immediate control over essential employment conditions rather than indirect influence or ordinary brand oversight.
Where the Act Stands Now
The American Franchise Act continues to advance through the legislative process. After several markup sessions, on July 21, 2026, the House Committee on Education and the Workforce voted 18-15 to report the amended bill favorably to the full House of Representatives, marking the first significant legislative advancement of the proposal. During those markup sessions, the committee revised the language of the Act to establish that a franchisor can only be deemed a joint employer if it possesses and directly exercises “substantial, direct, and immediate control” over essential employment terms, such as hiring, wages, or scheduling. The committee vote does not enact the legislation, but it signals meaningful momentum and places the Act in the next stage of congressional consideration. The bill will now proceed to the House floor for consideration, where it must be approved by the full House before advancing to the Senate. If the bill passes the full House, the Senate must take up and pass its companion measure (or the House bill) before it can move to the President's desk. Industry groups are targeting major lobbying pushes, such as the International Franchise Association Advocacy Summit in September, to drive further momentum.
Private equity firms evaluating whether to acquire a franchisor, a large multi-unit franchisee, or both, are driven by several overlapping motivations.Recurring, asset-light cash flow. Franchisors generate royalty and fee income — typically a percentage of franchisee gross sales — without bearing the capital costs of real estate, buildout, and staffing that franchisees absorb. This asset-light model, combined with the multi-year, non-cancelable nature of franchise agreements, produces the kind of predictable, contractually secured cash flow that private equity underwriting loves. Once the acquisition price has been recouped (whether through refinancing, dividend recapitalization, or simply the passage of time), continuing EBITDA becomes highly accretive to the sponsor's overall return, since the marginal cost of servicing an established franchise system is relatively low compared to the royalty stream it throws off.Elimination of competition and platform consolidation. Some acquisitions are motivated less by the isolated value of the target than by the value created by removing it as a competitor to a portfolio company the sponsor already owns, or by combining it with other brands to create a multi-brand platform with shared back-office infrastructure, purchasing power, and cross-marketing opportunities. Multi-brand consolidators — several of them themselves private equity-backed — have used this logic repeatedly to build diversified platforms out of what were once freestanding, single-brand franchisors.Adding a distribution network to an existing portfolio company. A sponsor that already owns a company — franchised or not — may acquire a franchisor to obtain an established distribution network through which to introduce a new product or service line, or to diversify into a secondary distribution channel that reduces the portfolio company's dependence on its original business. In this scenario, the franchisor acquisition is valued as much for the network of committed, capitalized local operators it delivers as for the franchisor's own standalone financials.Optimized, sometimes leveraged, use of investor capital. Ultimately, many of these acquisitions come down to a straightforward capital allocation decision: the sponsor believes it can deploy its investors' funds — often with meaningful leverage — into a franchise platform and generate a risk-adjusted return superior to other available uses of that capital. The franchise model's licensing structure, in which franchisees fund unit-level growth, allows a sponsor to accelerate expansion without matching capital contributions of its own, amplifying returns on the equity actually invested.
The Exit Is Always the Point
It is worth stating plainly what every experienced franchise practitioner already knows: private equity acquisitions of franchisors are almost never intended as permanent holds. The acquiror's underwriting, from day one, assumes an exit — whether an initial public offering, a sale to a strategic acquiror, or a sale to another financial sponsor — typically within a three-to-seven-year window. The intervening period is spent streamlining operations, expanding the franchised footprint, creating cost and marketing synergies (particularly where the brand is folded into a multi-brand platform), and introducing new products, services, technology, or capital that the prior ownership could not or did not provide. The hoped-for result is that the franchisor is sold or taken public at a materially higher multiple than the sponsor paid, yielding an outsized return on the equity actually committed. Everything the sponsor does post-closing — including its diligence-informed integration plan — is calibrated with that eventual exit in mind.
Due Diligence: Where Franchise Counsel Earns Their Keep
Every acquisition of scale involves rigorous due diligence, and franchisor acquisitions are no exception. But acquiring a franchisor requires diligence of a fundamentally different character than diligence on an ordinary operating company, and this is where the involvement of experienced franchise counsel — as distinct from generalist M&A counsel — becomes not merely helpful but essential.Said candidly, and without the slightest intention of disparaging our colleagues in the broader corporate / M&A bar, it is very often the case that the nation's most sophisticated M&A attorneys have little or no meaningful background in the structures, customs, and unwritten norms of franchising. They may be entirely capable of running a standard diligence process, negotiating representations and warranties, and structuring a purchase agreement — yet be unequipped to assess how the target's franchise network actually developed and evolved over time, how that history will bear on the network's future profitability, what franchisor-franchisee political dynamics are simmering beneath the surface, or how the transaction itself — simply by closing — may alter those dynamics and affect the network's forward performance.This is because a franchisor acquisition has a party at the table that does not exist in an ordinary corporate acquisition: the target's franchisee population. Franchisees are not merely customers, vendors, or employees who can be evaluated through financial statements and contracts. They are independent business owners bound to the franchisor through long-term agreements, often for a decade or more, whose cooperation, morale, and continued investment in their businesses are essential to the value the acquiror believes it is purchasing. A franchisee base that is disengaged, distrustful, or actively organizing against franchisor policies represents a very different acquisition than one with an engaged, well-capitalized, growth-oriented franchisee community — even where the franchisor's financial statements look identical on paper.Assessing that franchisee population is a genuinely strange diligence exercise. It requires, in effect, taking the temperature of a constituency that must never learn it is being examined. Premature knowledge that a sale is pending can trigger exactly the disruption the acquiror is trying to avoid — franchisee anxiety, accelerated departures, slowed development, or organized resistance through franchisee associations. Skilled franchise counsel must therefore assess franchisee sentiment, system health, and litigation or complaint history through indirect means: review of franchisee association communications and governance documents, analysis of default and termination histories, review of state registration and renewal filings and any related disclosures, assessment of encroachment and territorial disputes, review of item 20 and item 3 disclosures in the Franchise Disclosure Document across several years to spot turnover and litigation trends, and careful reading of the pattern (not merely the existence) of franchisee complaints. This is a fundamentally more amorphous and subjective undertaking than reviewing audited financials, and it is precisely the sort of analysis that generalist M&A counsel, however capable, is typically not equipped to perform.
Structuring and Pricing the Deal
Partial acquisition of equity. Private equity acquisitions of franchisors are frequently structured so that the sponsor does not pay the entire purchase price, or acquire the entire company, at closing. It is common for the sponsor to initially acquire roughly 70% to 80% of the franchisor's equity, with the remainder either purchased later (often pursuant to a put/call mechanism tied to future performance) or retained by the original owner or management team as a rollover equity stake. This structure aligns incentives during the transition period, keeps legacy management economically invested in the system's continued success, and can ease the tax and financing burden of the transaction.Pricing methodologies. There is no single accepted method for pricing a franchisor acquisition, and each of several recognized approaches has its own legitimacy depending on the target's industry and financial profile:
A multiple of gross revenues, more common for early-stage or high-growth systems where profitability is not yet stabilized.
A multiple of LTM (last twelve months) earnings per share, more typical where the target is a public or quasi-public company with an established earnings history.
RevPAR (revenue per available room), the standard barometer in the hotel and lodging segment, where per-room performance is a more reliable indicator of system health than aggregate revenue.
A multiple of LTM cash flow, used where cash generation, rather than reported earnings, best reflects the business's economics.
Book value, infrequently used given how poorly it captures the value of an asset-light franchise system, but occasionally relevant where the target holds substantial owned real estate or hard assets.
Comparable transactions, benchmarking the deal against recent sales of similarly situated systems.
Triangulation, in which several of the above methodologies are used together to test and validate a proposed price, rather than relying on any single metric in isolation.
By far the most commonly used metric, in franchise acquisitions as in M&A generally, is a multiple of the target's LTM EBITDA. What multiple a sponsor is willing to pay is a central subject of negotiation and fluctuates with the broader economic and financing environment — availability and cost of acquisition debt, prevailing interest rates, and the general appetite of the private equity market for the target's sector all bear directly on where that multiple lands.Purchase price adjustments. The headline multiple is rarely the final number. Buyers typically negotiate downward adjustments (or upward, in the seller's favor) for items such as net working capital variances from an agreed target, indebtedness and transaction expenses deducted from enterprise value to reach equity value, non-recurring or non-operating items excluded from adjusted EBITDA, and known contingent liabilities, including pending franchisee litigation or regulatory exposure uncovered in diligence.Holdbacks and escrows. It is standard for a meaningful portion of the purchase price to be held back or placed in escrow post-closing, typically for twelve to eighteen months. This serves two related purposes: first, it secures the seller's indemnification obligations for breaches of representations and warranties discovered after closing; and second, in many franchise deals, it is tied to the target's actual post-closing economic performance, protecting the buyer against the risk that pre-closing financial representations do not hold up once the sponsor is operating the system. Earnout provisions, tied to development milestones, royalty growth, or franchisee retention rates, serve a similar risk-allocation function.Currency considerations in cross-border deals. Where the target franchise system operates internationally, currency fluctuation adds a further layer of complexity to pricing. The letter of intent or pricing memorandum must specify precisely how currency movements between signing and closing will be handled — whether through a fixed exchange rate locked at signing, a collar mechanism that adjusts price only outside a specified band of currency movement, hedging arrangements procured by either party, or a true-up mechanism calculated at closing. Absent clear, carefully negotiated language on this point, currency volatility between letter of intent and closing can materially — and unexpectedly — shift the economics of the deal for either side.
Before anything else, retain a franchise attorney. Launching a franchise program requires the preparation of a Franchise Disclosure Document ("FDD") that complies with federal and applicable state franchise laws, and a suite of related agreements - - including the unit franchise agreement, and potentially an area development agreement for multi-unit developers. The FDD is a complex, heavily regulated document, and an improperly prepared one can expose a franchisor to significant legal liability. This is not the place to cut corners.
Form a New Franchisor Entity
Most franchise attorneys recommend that a client form a brand-new entity to serve as the franchisor company. A primary reason is practical: a newly formed entity generally avoids the requirement to provide three years of audited financial statements in the FDD - - a costly and time-consuming undertaking. Your accountant can help determine the most appropriate entity structure.
Protect Your Intellectual Property
Your trademarks, trade names, and service marks are among your franchise system's most valuable assets. The franchisor should apply for federal trademark registration with the United States Patent and Trademark Office before launching. Federal registration is important not only for brand protection, but also because it triggers certain exemptions from business opportunity laws in some states, reducing the number of state-level filings required.
For systems with significant proprietary content - - copyrighted materials, patentable processes, or trade secrets - - additional IP protections should also be considered. Many franchisors also choose to house their intellectual property in a separate legal entity to shield it from any future judgments or liabilities that may arise against the operating franchisor entity.
Engage a Qualified Accounting Firm
The FDD must include audited financial statements. For a newly formed franchisor entity, this means an audited opening balance sheet. Thereafter, the franchisor must arrange for updated audited financials annually within 120 days (a bit shorter in certain states) of the close of its fiscal year if it wishes to continue offering and selling franchises.
Not just any CPA will do. The accountant must be familiar with franchise-specific accounting standards - - including, for example, FASB's Accounting Standards Update No. 2014-09 (Topic 606), which governs how franchisors recognize revenue from initial franchise fees, area development fees, and renewal fees. In New York, only a registered CPA firm (not merely an individual CPA) that has completed the required peer review process may perform these audits.
Capitalize Adequately
Prospective franchisors should carefully assess whether they have sufficient capital not only to launch the franchise program, but to sustain it. Initial franchise fees alone are unlikely to cover the costs of supporting a growing system. If state franchise regulators determine that the franchisor entity lacks sufficient assets on its financial statements, they may require additional financial assurances as a condition of registration. Sound capitalization from the outset is essential.
Brand Standards - - Build the Operational Infrastructure
A franchise system is, at its core, a system - - and that system must be documented and teachable. Franchisors need to develop and be prepared to disclose a structured franchisee training program, covering the subject matter, duration, and format (classroom versus on-site) of each training module. Equally important is a comprehensive, confidential operations manual that gives franchisees a detailed how-to guide for running their franchised outlet consistently with the franchisor's brand standards. In fact, the sum total of these materials, and any new brand / system guidance materials that a franchisor issues in the future, are often defined in the franchise agreement as the “Brand Standards” (formerly what was typically called the “Operations Manual,” but there is a general awareness now that such a term is too narrow). Both documents (the training program and the operations manual) must be in place before the FDD is finalized. The Brand Standards should be treated as a living set of documents, updated on a continuous basis. Note that certain states require the table of contents of the franchisor’s training program to be submitted with the Franchise Disclosure Document when seeking franchise registration.
Franchisors should also establish clear site selection criteria for brick-and-mortar concepts, and have qualified personnel capable of evaluating proposed locations.
Navigate State Registration Requirements
Fourteen states require a franchisor to register its FDD with a state regulator before making any franchise offer or sale in that state - - unless a specific exemption applies. Several additional states have business opportunity laws that may impose independent filing obligations. The registration process requires executed (and in some cases notarized) state-specific forms and filing fees, and in some states, a review period during which examiners may issue comment letters requesting FDD modifications. This process can take weeks, and the timing must be carefully managed to ensure the franchisor does not make any premature offers.
Develop a Compliant Sales Strategy and Marketing Program
Franchisors must also think carefully about how they will market and sell franchises. Franchise sales advertising is regulated - - certain states require specific disclosure language in ads or advance filing of advertising materials. Franchise sellers must be trained on legally permissible sales tactics, including the strict prohibition on making any earnings claims not properly disclosed in the FDD.
A well-constructed franchise sales program will also include a robust digital presence: a franchise development website, a prospective franchisee inquiry form, and a structured process for "Discovery Days" or other interactions with candidates.
Implement a Franchise Compliance System
Perhaps the most underappreciated step for new franchisors is putting a formal compliance system in place before the first sale. Franchising's regulatory scheme exists to protect prospective franchisees from deceptive sales practices, and regulators take violations seriously. A compliance system should track, among other things, what representations were made during sales discussions, whether and when the prospective franchisee executed the FDD receipt, and whether the required waiting period between receipt and signing was honored. A documented compliance process is not just good practice - - it is a critical risk management tool.
Additional Considerations
Beyond the steps outlined above, franchisors should also consider applying to have their brand listed on the U.S. Small Business Administration's Franchise Directory, which can facilitate franchisee access to SBA-backed financing. Establishing supply-chain relationships with vendors, POS providers, and distributors will also be important to the system's long-term success. And once the FDD is registered, franchisors must remember to renew their registrations annually and amend the FDD whenever material changes occur - - a process that requires year-round attention.
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Launching a franchise system is a significant legal and business undertaking. The steps outlined here are interconnected, and the sequence matters. With experienced franchise counsel and the right team of professionals in place, a well-prepared franchisor can bring its brand to market with confidence - - and the legal foundation needed to grow.
ATTORNEY ADVERTISING. The attorneys at Kaufmann Gildin & Robbins LLP regularly counsel emerging and established franchisors on all aspects of franchise system development and compliance. Contact us to learn how we can help you build your franchise program the right way. Call David B. Ramsey at [nap_phone id="LOCAL-REGULAR-NUMBER-1"] or email dramsey@kaufmanngildin.com.]]>On Behalf of Kaufmann Gildin & Robbins<![CDATA[How Businesses Can Avoid Becoming an Unwitting Franchisor]]>https://www.kaufmanngildin.com/?p=512392026-08-17T18:54:31Z2026-07-08T21:57:35Z
However, businesses pursuing these expansion strategies often overlook a significant legal risk - - that risk being that they may inadvertently create a franchise relationship under applicable federal or state franchise laws, even though neither party intended to enter into a franchise arrangement. Calling an agreement a “license,” “dealer agreement,” or “strategic partnership” does not determine how the law will treat it. If the relationship has the legal characteristics of a franchise, the business granting the rights may unknowingly become an “unwitting franchisor.”
This risk, commonly referred to an “accidental franchise”, typically arises when a company allows another party to operate under or in association with its brand, receives required payments, and exercises enough control or provides enough assistance over the operator’s business. Once a relationship is treated as a franchise, the brand owner may face disclosure obligations, registration requirements in certain states, limits on termination or nonrenewal, potential rescission claims, regulatory scrutiny, and other consequences that can be costly and disruptive.
The Franchise Test: Three Elements to Watch
Although the details vary under federal and state law, whether a business arrangement qualifies as a franchise focuses on the presence of three core elements: (i) trademark association, (ii) a required payment and (iii) significant control or assistance.
Brand Association. A company may satisfy this element by allowing another party to use its trademark, trade name, logo, commercial symbol, or other brand identity. The operator does not necessarily need to present itself as a formal branch or office of the brand owner. If customers are likely to understand that the operator’s goods or services are associated with the brand, the element may be present.
Required Payment. Businesses often make the mistake of focusing solely on whether they charge a payment labeled as a "franchise fee." In reality, the definition is much broader. A franchise fee may include initial fees, royalties, training charges, advertising contributions, technology or software fees, renewal fees, mandatory purchases, or other required payments made as a condition of entering into or continuing the business relationship. Indirect payments can also matter, particularly where the brand owner receives an economic benefit from required purchases or approved suppliers.
Significant Control or Assistance. A company may satisfy this element if it exercises significant control over, or provides significant assistance regarding, the operator’s method of doing business. While reasonable quality control measures designed to protect a company's trademarks generally do not create a franchise, more extensive operational involvement may. This can include requirements relating to operating procedures, marketing, training, site selection, business systems, pricing guidance, software, quality standards, or ongoing operational support.
Why the Label Does Not Control
If all three elements are present, a business that thought it was creating a mere license or distribution arrangement may instead have created a regulated franchise relationship. One of the most common mistakes is relying on contract labels. Simply labeling an agreement as a “license,” “distributorship,” “affiliate program,” or “dealership” does not determine its legal status. A provision stating that the relationship is “not a franchise” is helpful only if the actual structure supports that conclusion. Regulators and courts look to the substance of the relationship. If the parties operate like a franchise system, the agreement’s title will not prevent franchise laws from applying.
Practical Steps to Reduce the Risk of Becoming an Unwitting Franchisor
Businesses can substantially reduce the risk of becoming an unwitting franchisor by carefully structuring their expansion strategy before entering into agreements with independent operators.
Evaluate the Business Model Early. Before launching a licensing, dealer, distributor, or affiliate program, businesses should have the proposed arrangement reviewed by experienced franchise counsel. An attorney can evaluate the relationship under applicable federal and state franchise laws, identify potential risks, and recommend changes before agreements are signed. The analysis should focus on the rights being granted, required payments, and the degree of operational control or assistance that will be provided.
Choose the Right Expansion Model. Avoiding franchise status is not always the best option. If the business intends to maintain a highly standardized system through recurring fees, extensive training, ongoing operational support, and significant brand control, a franchise model may be the more appropriate and legally compliant approach.
Limit Operational Control Where Appropriate. When a true licensing relationship is intended, businesses should exercise only the level of quality control necessary to protect their trademarks and brand reputation. Excessive involvement in an operator's day-to-day business may satisfy one of the key elements of a franchise.
Review All Required Payments. Businesses should evaluate every direct and indirect payment associated with the relationship. Initial fees, mandatory purchases, technology fees, training charges, or other required payments may qualify as franchise fees, even if they are not labeled as such.
Monitor the Relationship Over Time. Franchise risk can evolve over time. A licensing or distribution arrangement that initially falls outside franchise laws may later become a franchise if the business adds mandatory systems, new fees, operating manuals, or expanded operational support. Periodic reviews by franchise counsel can help identify and address potential issues before they become costly compliance problems.
If You May Already Be an Unwitting Franchisor
If a business believes it may have unintentionally created a franchise relationship, it should promptly consult experienced franchise counsel before offering additional agreements. An experienced franchise attorney can evaluate the relationship, assess potential exposure under applicable federal and state franchise laws, and recommend the most appropriate course of action. Depending on the circumstances, the relationship may be restructured to eliminate a franchise element or transitioned into a compliant franchise system.
Approximately 20 states have enacted franchise relationship laws that regulate the substantive relationship between franchisors and franchisees. These jurisdictions include Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, South Dakota, Utah (though not expressly about franchises), Virginia, Washington, and Wisconsin, plus certain U.S. territories and possessions such as Puerto Rico and the U.S. Virgin Islands.
Several states also have industry-specific statutes, such as automobile dealer laws and petroleum marketing laws. Florida, for example, has enacted robust protections for motor vehicle dealers under its Motor Vehicle Dealer Licensing Law. Ernie Haire Ford, Inc. v. Ford Motor Co., 260 F.3d 1285 (11th Cir. 2001) In this blog post, however, we do not focus on the industry-specific laws.
What Franchise Relationship Laws Typically Cover
State franchise relationship laws generally regulate five core areas:
Termination and Non-Renewal Restrictions
Most of these state relationship statutes prohibit franchisors from terminating or failing to renew a franchise without "good cause." Good cause is typically defined as the franchisee's failure to substantially comply with material requirements of the franchise agreement.
Transfer and Assignment Rights
Several states restrict a franchisor's ability to unreasonably withhold consent to the transfer or assignment of a franchise.
Notice Requirements
Franchise relationship laws impose specific notice requirements before termination or non-renewal becomes effective. These notice periods typically range from 60 to 180 days, depending on the circumstances and jurisdiction.
Encroachment and Territorial Protections
Some states, particularly those that regulate dealer relationships, regulate a franchisor's ability to establish or relocate dealerships within a franchisee's relevant market area. Minnesota's Motor Vehicle Sales and Distribution Act, for example, requires manufacturers to provide 90 days' notice of proposed changes to a dealer's area of sales effectiveness and prohibits arbitrary changes made without due regard to the present pattern of sales and registrations.
Modification of Franchise Agreements
Certain statutes, including Michigan's Franchise Investment Law, prohibit franchisors from requiring franchisees to sign updated agreements with materially different terms as a condition of transfer or renewal unless there is good cause and the requirement is commercially reasonable. However, courts have interpreted these protections to allow franchisors to enforce updated, modernized agreements during a transfer or renewal if systemwide uniformity and commercial reasonableness are maintained.
Other Features of Franchise Relationship Laws
Certain franchise relationship laws (for instance, those of Illinois and Washington) prohibit discrimination in the charges a franchisor can assess franchisees of a similar class for franchise fees, royalties, goods, services, equipment, rentals or advertising services.
Note also that the California Civil Rights Act prohibits discrimination in the granting of franchises solely on the basis of the race, color, religion, sex, national origin or disability of the prospective franchisee or the racial, ethnic, religious, national origin or disability composition of a neighborhood or geographic area in which the franchise is to be located.
Many franchise relationship statutes restrict a franchisor’s ability to prohibit the “right of free association” among franchisees, typically through franchisee associations. A number of relationship statutes impose a general duty of good faith on the franchisor and franchisee. Some restrict a franchisor from placing competitive units too close in proximity to existing units.
Penalties/Remedies for Noncompliance
As is the case with federal and state franchise registration/disclosure statutes, most state franchise relationship laws vest in government officials broad powers to investigate any violative conduct and, if same is uncovered, to commence legal actions against the franchisor seeking damages; rescission; restitution; and, fines and/or penalties.
In addition, a few state franchise relationship laws impose criminal liability upon franchisors committing violative conduct.
As is also the case with state franchise registration/disclosure statutes, many state franchise relationship laws confer upon franchisees injured by violative conduct the right to commence legal proceedings against their franchisor seeking injunctions; damages; rescission; court costs; and attorney fees.
Some Best Practices for Compliance
Document Good Cause Thoroughly
When terminating or not renewing a franchise, meticulously document the franchisee's failures to comply with material franchise requirements. In 2024, in Mall Chevrolet, Inc. v. GM LLC, General Motors successfully defended a termination under New Jersey law by presenting substantial evidence of fraudulent warranty claims, including audit findings and employee admissions. The U.S. District Court in New Jersey held that submission of false warranty claims constituted a material breach and therefore was good cause for termination. Mall Chevrolet, Inc. v. GM LLC, 99 F.4th 622 (3d Cir. 2024)Provide Complete Written Notice
Ensure termination notices include all grounds for the action. In some cases that go to litigation, franchisors may later be limited to the grounds for termination they set forth in the written notice. Failing to identify all reasons in the initial notice may prevent the franchisor from relying on those grounds later.
Evaluate Commercial Reasonableness
In many cases, requiring the franchisee to sign a new franchise agreement upon renewal, which may be materially different from the original franchise agreement, has been upheld as permissible. For a recent example, in Oakland Family Restaurants, Inc. v. American Dairy Queen Corp., the Sixth Circuit upheld Dairy Queen's requirement that transferees sign updated franchise agreements, finding this condition commercially reasonable and constituting good cause under Michigan's Franchise Investment Law. Oakland Family Rests., Inc. v. Am. Dairy Queen Corp., No. 24-1331, 2025 U.S. App. LEXIS 5980 (6th Cir. Mar. 12, 2025) In that decision, the U.S. Court of Appeals for the Sixth Circuit emphasized that a 1965 franchise agreement could not adequately address modern technological, legal, and competitive requirements, including internet ordering, electronic payments, data security and brand standardization.
Respect Contractual Territorial Rights
A franchisor must be quite careful about expanding territorial restrictions applicable to a franchisee beyond what the franchise agreement expressly provides. A franchisor must bear in mind the need to comply with the implied covenants of good faith and fair dealing. That being said, courts have held that franchisors may service areas outside a franchisee's exclusive territory if the agreement does not prohibit such activity. The subject of territorial encroachment can get quite nuanced and complex, and will be the subject of another of our blog posts.
Some Things for Franchisors to Avoid
Avoid Arbitrary or Discriminatory Actions
A franchisor should generally avoid terminating, refusing to renew, or withholding consent to transfers based on subjective preferences or to favor other franchisees. A franchisor should seek to ensure that all standards applied are objective, reasonable, and consistently enforced to the extent possible, at least with respect to similarly situated franchisees.
Beware “Unclean Hands”
Courts may deny franchisors equitable relief when they have acted inequitably. For a recent example of this, see Fetch! Pet Care, Inc. v. Atomic Pawz Inc., where the U.S. Court of Appeals for the Sixth Circuit affirmed denial of a preliminary injunction where the franchisor had cut off legacy franchisees from its system while they were current on payments and before they breached non-compete obligations. Fetch! Pet Care, Inc. v. Atomic Pawz Inc., 170 F.4th 546 (6th Cir. 2026) In that case, the federal district court had applied the “unclean hands” doctrine to deny a preliminary injunction against former franchisees operating competing businesses. The Court of Appeals upheld that decision.
Never Require Unlawful Waivers
The "no waiver" (or anti-waiver) principle in franchise relationship laws (as well as virtually all franchise registration/disclosure laws) can render a contractual clause void in some cases if it requires a franchisee to waive their statutory rights, protections, or remedies. It operates as a legislative safety net to protect franchisees from unequal bargaining power and what may be perceived as overreaching terms dictated by franchisors. In some states, a waiver of compliance with the relationship laws is ineffective, and such principle has been upheld in court. See, for example, Cal. Bus. & Prof. Code §§ 20010 and 20015, which specifically states that the California Franchise Relations Act applies when a franchisee resides in California or when the franchised business operated in California and voids any attempt to waive that provision. At the same time, depending on the jurisdiction, a state’s countervailing policy in favor of enforcing contractual provisions, such as choice-of-law provisions, may prevail over the anti-waiver principle, particularly where there is no great disparity in the bargaining positions of the parties.
The Regulatory Landscape and the Cost of Non-Compliance
Under the FTC's Franchise Rule, franchisors are required to provide prospective franchisees with a Franchise Disclosure Document before any sale is made and before any money changes hands. Many states layer additional requirements on top of the federal baseline, including pre-sale registration of the FDD with state regulators, review and approval before offers can be made to residents of those states, and specific timing and delivery requirements.
Failures to comply with these obligations carry real consequences. State franchise regulators have authority to investigate, issue cease-and-desist orders, impose fines, and refer matters for criminal prosecution in egregious cases. Perhaps more significantly for franchisors, a franchisee who was not properly disclosed can seek rescission of the franchise agreement — meaning the unwinding of the entire deal — and in some states may be entitled to recover damages, attorneys' fees, and other relief. Litigation stemming from disclosure failures is expensive, disruptive, and reputationally damaging, and it is largely preventable with the right training and protocols in place.
Understanding the FDD: More Than a Document to Hand Over
The Franchise Disclosure Document is a detailed, legally mandated disclosure containing 23 required items covering everything from the franchisor's litigation history and financial condition to the terms of the franchise agreement and the franchisee's estimated initial investment. Franchise executives and salespeople need to understand not just that the FDD exists, but what it contains, why it matters, and precisely how and when it must be furnished to a prospect.
The timing rules alone require careful attention. Under the FTC Rule, a franchisor must give a prospective franchisee the FDD at least 14 calendar days before the franchisee signs any agreement or makes any payment. Some states impose additional or different timing requirements. Getting this wrong — even by a day, or by furnishing a superseded version of the FDD — can create significant legal exposure.
Pre-Sale Disclosure Obligations and the Importance of State Registration
Beyond the mechanics of FDD delivery, franchisors must understand the basic framework of pre-sale disclosure obligations. In states often referred to as "registration states" — including some of the most populous such as New York, California, Maryland, Illinois, Virginia, and others — a franchisor generally may not offer or sell a franchise to a state resident until its FDD has been registered and approved by that state's franchise regulatory authority. Making an offer before registration is complete can itself constitute a violation, regardless of whether a sale is ultimately consummated.
Franchise sales personnel need to know which states have registration requirements, the current status of the franchisor's registration in each state, and what they may and may not say or do with a prospective franchisee whose home state has not yet cleared the franchisor's registration.
Exemptions: Proceed with Caution
Both federal and state franchise laws contain exemptions that, if applicable, may relieve a franchisor of some or all of the usual disclosure and registration obligations. Common exemptions include those for sophisticated franchisees, large investments, or sales to existing franchisees. While these exemptions can be valuable, they are also fact-specific and vary considerably from state to state.
The critical point for franchise personnel to understand is this: the existence of a potential exemption does not mean the exemption applies. Before relying on any exemption, franchisors should consult with qualified franchise counsel to confirm that all conditions for the exemption are satisfied under the law of the applicable state. Assuming an exemption applies without that analysis is a common — and costly — mistake.
The Minefield of Financial Performance Representations
Perhaps no area of franchise sales compliance generates more litigation than financial performance representations, disclosed in Item 19 of the FDD. Under the FTC Rule, a financial performance representation is broadly defined as any representation — oral or written — made to a prospective franchisee regarding actual or potential sales, income, gross revenues, or profits.
That definition is far broader than most people appreciate. A franchise salesperson who tells a prospect "our top franchisees are doing really well" or "in a market like yours, you could expect to do better than average" may have just made an FPR. So might a salesperson who shares a franchisee's tax return, passes along informal earnings estimates, or even makes offhand statements about the profitability of the business model.
If a franchisor wants to make a financial performance representation, it must be made through a properly prepared Item 19 disclosure. Representations made outside that framework — or that go beyond what Item 19 discloses — expose the franchisor to claims of fraud, misrepresentation, rescission, and damages. Training franchise sales staff to understand the breadth of the FPR definition, and to exercise disciplined caution in every prospect conversation, is one of the most important steps a franchisor can take to reduce litigation risk.
Franchise Advertising and Recruitment Compliance
Franchise recruitment advertising — whether in print, online, through social media, or via third-party brokers and referral networks — is itself subject to legal requirements. The FTC Rule requires that franchise advertisements not be misleading and that certain disclosures accompany specific types of earnings claims made in advertising. Several states, including California and New York, impose additional requirements on franchise advertising materials, including in some cases pre-use filing obligations before certain advertising pieces may be used to solicit prospects in those states.
Sales and marketing personnel need to understand what review and approval processes must occur before advertising is published, and the firm should have a clear protocol for submitting and tracking any required state filings.
Building a Compliance Culture: Records, Documentation, and Internal Protocols
Compliance is not a one-time event; it is an ongoing program. Franchisors should maintain detailed records of every franchise offer and sale, including documentation of FDD delivery, the dates on which FDDs were furnished, signed receipts from prospective franchisees acknowledging receipt of the FDD, and records of any state filings and registration approvals. These records serve a critical evidentiary function if the franchise is ever challenged on disclosure compliance.
Equally important is the establishment of internal protocols that govern what franchise sales personnel may and may not say and do during the sales process. Without clear guidelines — and regular reinforcement through training — even well-intentioned employees can inadvertently create legal exposure for the franchisor.
For decades, post-term noncompete provisions have been a standard feature of franchise agreements and a key tool for protecting franchise system goodwill, proprietary business methods, confidential information, and customer relationships. Virginia’s amendment significantly alters that framework. Franchisors that have traditionally relied on post-term restrictive covenants to safeguard their brands and business interests must now reevaluate their contractual protections and compliance strategies. Going forward, franchisors operating in Virginia should expect that traditional post-term noncompete provisions in covered agreements will be unenforceable if included in franchise agreements offered or entered into on or after July 1, 2026.
Limited Exception for Franchise Sales
Virginia’s prohibition on post-termination noncompete provisions is not without exceptions. The amended statute permits a limited noncompete restriction when a franchisee voluntarily sells its franchise business at a mutually agreed-upon price, whether to a third party or back to the franchisor. In those circumstances, the parties may agree to a noncompete covenant lasting up to two years following the sale.
Importantly, the amendments are forward-looking and do not invalidate existing franchise agreements. Franchise agreements entered into before July 1, 2026 generally remain subject to the law in effect when they were executed. However, franchisors should carefully evaluate renewals, amendments, transfers, extensions, and other franchise-related agreements entered into on or after July 1, 2026, as such transactions may trigger application of the amended Act.
The statutory exception for franchise sales reflects the long-recognized legal distinction between restrictive covenants imposed on franchisees during or following a franchise relationship and those arising from the sale of a business. Courts have historically afforded greater protection to noncompete agreements associated with the sale of a business because the purchaser is acquiring valuable assets, including goodwill, customer relationships, and other proprietary business interests, and has a legitimate interest in protecting the value of that acquisition.
Virginia Law Must Govern Virginia Franchise Agreements
As previously noted, the amendments do more than prohibit post-termination noncompete provisions. They also require that any franchise agreement involving the establishment or operation of a franchised business in Virginia be governed by Virginia law. As a result, franchisors may no longer rely on governing-law provisions that designate the law of another state for covered Virginia franchise relationships.
Because many franchisors utilize standardized franchise agreements that select the law of the franchisor’s home state, this change may require revisions to existing franchise documentation and state-specific addenda. Franchisors offering franchises in Virginia should carefully review their governing-law provisions and related disclosure documents to ensure compliance with the amended Act before July 1, 2026.
Practical Implications for Franchisors
The loss of post-termination noncompete protections does not mean franchisors are without remedies. Instead, franchisors should consider strengthening alternative contractual protections that remain enforceable.
Areas that deserve particular attention include:
Confidentiality and trade secret protections.
Non-disclosure obligations regarding proprietary operating systems and manuals.
Customer and vendor non-solicitation provisions, where permitted.
Robust trademark de-identification requirements upon termination.
Technology access restrictions and data security measures.
Strong post-termination transition obligations.
Rights to purchase assets or leasehold interests under appropriate circumstances.
Franchisors should also evaluate operational controls that help protect system goodwill and confidential information during the franchise relationship, rather than relying primarily on post-term restrictive covenants.
Traditionally, franchisors have used post-termination noncompete provisions to prevent former franchisees from leveraging the knowledge, goodwill, customer relationships, and operational insight gained through the franchise relationship to compete with the franchisor. But preventing competition and protecting the franchisor’s legitimate franchise system interests are not necessarily the same objective, particularly as the enforceability of post-termination noncompetes comes under increasing scrutiny.
Even when a franchisor cannot prevent a former franchisee from competing, it continues to have legitimate interests to protect - - including its trademarks, trade dress, confidential information, proprietary systems, customer information, digital assets and other components of its franchise system.
The answer is not to simply replace a noncompete with another broad restriction or rely on a single restrictive covenant to protect these distinct interests. Instead, franchisors should assess whether their franchise agreements are structured as a coordinated framework addressing the protection, use and disposition of these assets and relationships when the franchise relationship ends.
Most franchise attorneys recommend that a client form a brand-new entity to serve as the franchisor company. A primary reason is practical: a newly formed entity generally avoids the requirement to provide three years of audited financial statements in the FDD - - a costly and time-consuming undertaking. Your accountant can help determine the most appropriate entity structure.
Your trademarks, trade names, and service marks are among your franchise system's most valuable assets. The franchisor should apply for federal trademark registration with the United States Patent and Trademark Office before launching. Federal registration is important not only for brand protection, but also because it triggers certain exemptions from business opportunity laws in some states, reducing the number of state-level filings required.
For systems with significant proprietary content - - copyrighted materials, patentable processes, or trade secrets - - additional IP protections should also be considered. Many franchisors also choose to house their intellectual property in a separate legal entity to shield it from any future judgments or liabilities that may arise against the operating franchisor entity.
Beyond the steps outlined above, franchisors should also consider applying to have their brand listed on the U.S. Small Business Administration's Franchise Directory, which can facilitate franchisee access to SBA-backed financing. Establishing supply-chain relationships with vendors, POS providers, and distributors will also be important to the system's long-term success. And once the FDD is registered, franchisors must remember to renew their registrations annually and amend the FDD whenever material changes occur - - a process that requires year-round attention.
---
Launching a franchise system is a significant legal and business undertaking. The steps outlined here are interconnected, and the sequence matters. With experienced franchise counsel and the right team of professionals in place, a well-prepared franchisor can bring its brand to market with confidence - - and the legal foundation needed to grow.
ATTORNEY ADVERTISING. The attorneys at Kaufmann Gildin & Robbins LLP regularly counsel emerging and established franchisors on all aspects of franchise system development and compliance. Contact us to learn how we can help you build your franchise program the right way. Call David B. Ramsey at [nap_phone id="LOCAL-REGULAR-NUMBER-1"] or email dramsey@kaufmanngildin.com.]]>
The Franchise Disclosure Document is a detailed, legally mandated disclosure containing 23 required items covering everything from the franchisor's litigation history and financial condition to the terms of the franchise agreement and the franchisee's estimated initial investment. Franchise executives and salespeople need to understand not just that the FDD exists, but what it contains, why it matters, and precisely how and when it must be furnished to a prospect.
The timing rules alone require careful attention. Under the FTC Rule, a franchisor must give a prospective franchisee the FDD at least 14 calendar days before the franchisee signs any agreement or makes any payment. Some states impose additional or different timing requirements. Getting this wrong — even by a day, or by furnishing a superseded version of the FDD — can create significant legal exposure.
Perhaps no area of franchise sales compliance generates more litigation than financial performance representations, disclosed in Item 19 of the FDD. Under the FTC Rule, a financial performance representation is broadly defined as any representation — oral or written — made to a prospective franchisee regarding actual or potential sales, income, gross revenues, or profits.
That definition is far broader than most people appreciate. A franchise salesperson who tells a prospect "our top franchisees are doing really well" or "in a market like yours, you could expect to do better than average" may have just made an FPR. So might a salesperson who shares a franchisee's tax return, passes along informal earnings estimates, or even makes offhand statements about the profitability of the business model.
If a franchisor wants to make a financial performance representation, it must be made through a properly prepared Item 19 disclosure. Representations made outside that framework — or that go beyond what Item 19 discloses — expose the franchisor to claims of fraud, misrepresentation, rescission, and damages. Training franchise sales staff to understand the breadth of the FPR definition, and to exercise disciplined caution in every prospect conversation, is one of the most important steps a franchisor can take to reduce litigation risk.
Virginia has enacted one of the most significant changes to its franchise laws in recent years. On April 13, 2026, Governor Abigail Spanberger signed House Bill 69 and Senate Bill 240 into law, substantially amending the Virginia Retail Franchising Act (the “Act”). Effective July 1, 2026, the amendments prohibit franchisors from including most post-termination noncompete provisions in franchise agreements offered or entered into in Virginia.
Specifically, the amended Act makes it unlawful for a franchisor to offer or enter into a franchise agreement that restricts a franchisee, following the expiration or termination of the franchise relationship, from engaging in the retail sale, offering, or distribution of goods or services similar to those offered by the franchisor. As a result, franchisors generally may no longer require Virginia franchisees to refrain from operating a competing business after their franchise rights have ended.
The amendments also impose new choice-of-law requirements, mandating that certain franchise agreements involving a franchise location in Virginia be governed by Virginia law. Together, these changes represent a significant shift in the legal framework governing franchise relationships in Virginia and may necessitate revisions to franchise agreements, state-specific addenda, and compliance protocols. Franchisors with existing or prospective Virginia franchisees should carefully assess the implications of these amendments and take appropriate steps to ensure compliance before offering, renewing, extending, or amending franchise agreements in the Commonwealth.
As previously noted, the amendments do more than prohibit post-termination noncompete provisions. They also require that any franchise agreement involving the establishment or operation of a franchised business in Virginia be governed by Virginia law. As a result, franchisors may no longer rely on governing-law provisions that designate the law of another state for covered Virginia franchise relationships.
Because many franchisors utilize standardized franchise agreements that select the law of the franchisor’s home state, this change may require revisions to existing franchise documentation and state-specific addenda. Franchisors offering franchises in Virginia should carefully review their governing-law provisions and related disclosure documents to ensure compliance with the amended Act before July 1, 2026.