The offer and sale of franchises are regulated by the FTC Rule, but the rule has minimum requirements for franchise sales professions. This may be changing because franchise companies rarely sell franchises directly.

Franchise companies typically utilize third-party franchise sales professionals to help find quality franchisees, those with the financial wherewithal to purchase and expand the franchise, and to cultivate the prospects to final purchase. Given the competition for franchises, finding the best franchisees requires skilled salespersons who comply with the FTC Rule for the offering and sale of franchises and other rules in some states. This article is an introduction to the world of franchise sales professionals. For more detail, I recommend E. Gerhards, H. Hillman and G. Wells, “The Latest on Working with Franchise Sales Organizations, Agents and Brokers,” ABA Forum on Franchising, November 2-4, 2022.

Prospects Buy Franchises From Many Sources

Franchise sales brokers are engaged as independent sales agents to solicit a franchise purchase and are paid a commission. They may also be called coaches, consultants, agents and representatives. They may work under the same roof as the franchisor but are not employees of the franchisor. Brokers may associate themselves within a broker network and the network may represent more than one franchise offering. Existing franchisees in a system may act as referral agents, and sometimes earn a fee, for referring prospects to the franchisor. Lead generation networks advertise various franchise offers, typically on lead generation websites or portals. They identify prospects and may qualify them through a qualification form. They provide the name and identity of the prospects to the franchisor for compensation.

Business brokers that sell existing businesses may also sell new unopened franchise opportunities. Business brokers may have existing franchised units for sale, or may refer to the franchisor prospects who would contemplate a new, ground up, franchise unit. Franchisors may also have formalized arrangements with existing franchisees to sell or support new franchises.

Area representative agreements allow franchisees in the system to sell and support franchisee prospects in a given geography, usually for a portion of the initial and future franchise fees. For international development, a franchisor might grant a master franchise agreement in a country to use sub-franchising or a master licensing structure to sell and support prospects in lieu of the franchisor in a distant country.

Outside Sales Professional Have Their Positives and Negatives

On the positive side, third-party sales professionals may introduce prospects to multiple brands to compare and contrast. But because of their contractual obligations to the franchisor, they may not be in the same industry. Don’t expect the sales broker to introduce two competing coffee brands to the prospect. But perhaps the business broker who is selling existing businesses might be able to do so. The sales professional may have great knowledge or limited knowledge regarding the competitive landscape. The sales professional may act as a liaison for the prospective franchisee or even its advocate. Do not expect the sales professional to act as the “buyers agent” as in a real estate transaction where the buyer’s agent has the obligation to protect the buyer’s interest. Unless the sales agent represents in writing that their interests are to protect and counsel the prospect, they are first and foremost sales agents of the franchisor.

Legal Issues Involving Franchise Sales Professionals

Franchise prospects being introduced to franchise sales professionals may not have the background to understand that they are being actively sold. The FTC Rule requires the franchisor to disclose the “name, principal business address and telephone number of each franchise seller offering the franchise.” The rule further provides “A franchise seller is a person that offers for sale, sells, or arranges for the sale of a franchise.” The one reason for this disclosure is to maintain a log of who is contacting the franchisee for “law enforcement purposes, identifying who may be responsible for furnishing disclosures.” Unfortunately, many franchisors and brokers do not comply with this rule, either out of inadvertence, or purposely to conceal the role of the sales professional in the sales process. Some states require registration with the state of sales professionals to maintain integrity of the process.

Sales professionals, as agents of the franchisor, and franchisors as principals of the sales professionals, can be civilly liable for violations of the FTC Rule. In a case where former franchisees sued the franchisor for misrepresentation by a sales agent expressly empowered by the franchisor to expand franchisees in the geography, and the agent was the only one who made the misrepresentations, the court held that the franchisor could be responsible and that even compensatory or punitive damages could be imputed to the innocent principal franchisor because the acts were with the express authority granted. The cases imposing liability require the broker to know of the falsity of the misrepresentations in order to be liable themselves. A franchisor’s false or fraudulent misrepresentations in the franchise disclosure document are not generally imputed to the sales professional.

What Do Lawyers Need to Know About Franchise Sales Professionals?

Lawyers need to know that franchise prospects are educated by the sales professionals and perhaps rely too much on their advice. Many of these professionals are highly paid and sharp businesspeople, who can take advantage of novices. Most fortunately, believe they are performing an educational service to the franchisee, but still have a conflict of interest as they are generally paid a sales commission on consummation of the sale.

Lawyers need to educate the franchise prospect as client on the true role and possible conflicts of the sales professional. Lawyers need to assess what the sales professional told the client, which the client deems material and to verify the information upon which the client relied. The lawyer representing the prospect can talk to the sales professional to confirm certain information as well, as most professionals are honest, and if asked, will be transparent about their roles. No reason exists that honest sales professionals cannot work side by side with lawyers to consummate a franchise sale that is in the best interest of our clients.

Reprinted with permission from the January 23, 2023 issue of The Legal Intelligencer© 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.