Amacom Franchising And Licensing_2 docx

78 FRANCHISING AS A GROWTH STRATEGY as well as the right to adjust the size of this territory in the event that certain contractual conditions are not met, such as the fail- ure to achieve certain performance quotas. The right of the fran- chisor to establish company-owned units or to grant franchises to others within the territory must be disclosed. A detailed de- scription and/or map of the franchisee’s territory should be in- cluded as an exhibit to the franchise agreement. In addition to disclosing whether it has established or may establish addi- tional franchised or company-owned outlets that may compete with franchisees’ outlets, the franchisor must disclose whether it has established or may establish ‘‘other channels of distribu- tion’’ under its mark. The franchisor must disclose the condi- tions under which it will approve the relocation of a franchise or the establishment of additional franchises. In addition, a franchisor must disclose whether it or an affiliate operates or has plans to operate another chain or channel of distribution under a different trademark to sell goods or services that are similar to those offered by the franchise. If the franchisor oper- ates competing systems, it must also disclose the methods it will use to resolve conflicts between them regarding territory, cus- tomers, and franchisor support. If the principal business ad- dress of the competing system is the same as the franchisor’s, it must also disclose whether it maintains separate offices and training facilities. Item 13: Trademarks. Franchisors need only disclose the principal trade- marks, rather than all trademarks, to be licensed to the fran- chisee. If a principal trademark is not federally registered, franchisors must include a statement that ‘‘[b]y not having a Principal Register federal registration for (trademark), fran- chisor does not have certain presumptive legal rights granted by a registration.’’ Item 14: Patents, Copyrights, and Proprietary Information. If the fran- chisor claims proprietary rights in confidential information or trade secrets, it must disclose the general subject matter of its proprietary rights and the terms and conditions under which they may be used by the franchisee. Item 15: Obligation to Participate in the Actual Operation of the Fran- chised Business. Franchisors are required to disclose obliga- tions arising from its practices, personal guarantees, and confidentiality or noncompetition agreements. Item 16: Restrictions on What the Franchisee May Sell. In this section the franchisor must disclose any special contractual provisions or other circumstances that limit either the types of products and services the franchisee may offer or the types or location of the customers to whom the products and services may be offered. 10376$ $CH5 10-24-03 09:37:31 PS 79 FEDERAL AND STATE REGULATION OF FRANCHISING Item 17: Renewal, Termination, Transfer, and Dispute Resolution. The disclosures must be presented in a prescribed tabular form. The table must contain abbreviated summaries regarding 23 specific categories with references to relevant sections of the franchise agreement. Preceding the table, the offering circular must state: ‘‘[t]his table lists important provisions of the franchise and re- lated agreements. You should read these provisions in the agree- ments attached to this offering circular.’’ Item 18: Public Figures. Any compensation or benefit given to a public figure in return for an endorsement of the franchise and/or prod- ucts and services offered by the franchisee must be disclosed. The extent to which the public figure owns or is involved in the management of the franchisor must also be disclosed. The disclosure is only required if a public figure endorses or recommends an investment in the franchise to prospective franchisees. Consequently, franchisors need not disclose fran- chisees’ rights to use the names of public figures who are fea- tured in consumer advertising or other promotional efforts. Item 19: Earnings Claims. If the franchisor is willing to provide the pro- spective franchisee with sample earnings claims or projections, they must be discussed in Item 19. Item 20: List of Franchise Outlets. A full summary of the number of fran- chises sold, number of operational units, and number of com- pany-owned units, including an estimate of franchise sales for the upcoming fiscal year broken down by state. The names, ad- dresses, and telephone numbers of franchisees should be in- cluded in this item. With the exception of the list of franchise names, addresses, and telephone numbers, franchisors must disclose all information required by this item in tabular form. The franchisor must disclose the number of franchised and company-owned outlets sold, opened, and closed in its system as of the close of each of its last three fiscal years. Operational outlets must be listed separately from those not opened, and disclosure must be provided on a state-by-state basis. The fran- chisor may limit its disclosure of the franchisees’ names, ad- dresses, and telephone numbers to those franchised outlets in the state in which the franchise offering is made if there are 100 outlets in such state. If there are fewer than 100 in the state, the franchisor must disclose the names, addresses, and telephone numbers of franchised outlets from contiguous states and, if necessary, the next closest states until at least 100 are listed. For the three-year period immediately before the close of its most recent fiscal year, the franchisor must disclose the number of franchised outlets that have: (1) had a change in ‘‘controlling ownership interest;’’ (2) been canceled or terminated; (3) not been renewed; (4) been re-acquired by the franchisor; or (5) oth- erwise ceased to do business in the system. The franchisor must 10376$ $CH5 10-24-03 09:37:31 PS 80 FRANCHISING AS A GROWTH STRATEGY disclose the last known home address of every franchisee who has had an outlet terminated, canceled, not renewed, or who otherwise voluntarily or involuntarily ceased to do business under the franchise agreement during the most recently com- pleted fiscal year end or who has not communicated with the franchisor within ten weeks of the application date. In addition, the franchisor must disclose information about company- owned outlets that are substantially similar to its franchised outlets. The same table may be used for both franchised and company-owned outlets so long as the data regarding each is set out in a distinct manner. Item 21: Financial Statements. The franchisor must include its audited balance sheet for the last two fiscal years. Audited statements of operations, stockholder’s equity, and cash flow are required for the franchisor’s last three fiscal years. If the most recent balance sheet and statement of operations are as of a date more than 90 days before the application date, the franchisor must also in- clude an unaudited balance sheet and statement of operations for a period falling within 90 days of the application. If the fran- chisor does not have audited financial statements for its last three fiscal years, it may provide either (1) an audited financial statement for its last fiscal year and, if the audit is not within 90 days of the application date, an unaudited balance sheet and income statement for a period falling within 90 days of applica- tion; or (2) an unaudited balance sheet as of the date within 90 days of the application and an audited income statement from the start of its fiscal year through the date of the audited balance sheet. Item 22: Contracts. A copy of the franchise agreement as well as any other related documents to be signed by the franchisee in con- nection with the ownership and operation of the franchised business must be attached as exhibits to the UFOC. Item 23: Receipt. Franchisors are required to provide two copies of the Receipt in the offering circular, one to be kept by the prospec- tive franchisee and the other to be returned to the franchisor. The franchisor must disclose the name, principal business ad- dress, and telephone number of any subfranchisor or franchise broker offering the franchise in the state. The Receipt must con- tain an itemized listing of all exhibits to the offering circular. If not previously disclosed in Item 1, the franchisor must disclose the name(s) and address(es) of its agent(s) authorized to receive service of process. The Mechanics of the Registration Process Each of the registration states has slightly different procedures and require- ments for the approval of a franchisor prior to offers and sales being author- (text continues on page 84) 10376$ $CH5 10-24-03 09:37:32 PS 81 FEDERAL AND STATE REGULATION OF FRANCHISING Figure 5-2. Data to gather when implementing a franchising program. The FTC and the Registration States have adopted regulations that dictate the contents of the franchise offering circular. The disclosure requirements range from history of the company and its principals (includ- ing litigation and bankruptcies) to a detailed description of the terms of the franchise agreement to be executed by the franchisee. The mandatory contents of the franchise offering circular will, therefore, provide an appropriate starting point for a new franchisor in developing its franchising program. 1. Information Regarding the Company and Its Principals. The following information should be provided with respect to the Company and its principals: a. History of the Company’s operations and business. Identify any predecessors and/or affili- ated companies. b. Describe the market to be serviced by franchisees. The description will include information about general or specific markets to be targeted, whether the market is developed or developing and whether the business is seasonal. In addition, general information about industry-specific laws and regulations must be included, along with a description of the competition. c. Identify all of the Company’s directors, principal officers and other executives who have management responsibility in connection with the operation of the Company’s business. As to each, provide a summary of their job history for at least the past five (5) years. d. Identify and describe all litigation in which the Company, its officers and directors is in- volved or has previously been involved. e. Identify and describe any and all bankruptcy proceedings involving the Company, its offi- cers and directors. 2. Initial Fees. The offering circular must disclose all payments a franchisee is required to make to the franchisor before opening the franchised business. This will include the initial franchise fee and any other pre-opening purchases/leases from the franchisor. Before determining the initial franchise fee, you may want to compare the fees charged by competitors. The fee may be expressed as a single amount for all franchisees, or it may be a range of amounts, based on criteria you specify. In addition, we will need to know if you have any plans for allowing the fee to be paid in installments, and whether the fee will be refundable under certain conditions. The disclosure should also discuss the allocation of the initial franchise fees collected by the franchisor. For example, fees are often used to cover administra- tive and legal costs associated with the franchise offer, as well as to fund initial training programs and other pre-opening assistance provided by the franchisor. 3. Royalty. The royalty rate and method of payment must be determined. Again, a comparison of competitors’ royalty structures may be helpful. The royalty formula (e.g., percentage of gross sales), payment frequency and refundability must be disclosed. 4. Advertising Fund. Will you require franchisees to contribute to a regional or national advertising fund? Typically, advertising fund contributions are based on the same formula, and made with the same frequency as royalty payments. If such a fund is contemplated, we will need to discuss the fund’s objectives, administration and participants (company-owned stores?). Note: All fees collected for the advertising fund must be used for that purpose. 5. Other Fees Paid to Franchisor. The offering circular must identify all other fees that a fran- chisee is required to pay to the franchisor, or to the franchisor’s affiliate, including fees collected on behalf of third parties. Typically, these fees include ongoing training/consultant fees and expenses, real property and equipment leases, required supply purchases, transfer fees, renewal fees and audit fees. 6. Initial Investment. The offering circular must include a chart detailing all costs necessary to begin operation of the franchised business and to operate the business during the first 3 months (or some other initial phase more appropriate for the industry), including the costs of furniture, equipment, supplies, inventory, leasehold improvements, rent security, utilities, advertising, insurance, licenses and (continues) 10376$ $CH5 10-24-03 09:37:32 PS 82 FRANCHISING AS A GROWTH STRATEGY Figure 5-2. (Continued). permits. (Please note that the ‘‘initial phase’’ is not the equivalent of a ‘‘break-even point.’’) Many of the cost items will be stated in a low-high range, rather than a specific amount. 7. Sources for Products and Services. What products and services must franchisees purchase: (a) only from the franchisor or its affiliates? (b) only from approved suppliers? (c) only in accordance with the franchisor’s specifications? Will the franchisor derive any revenue from these purchases? For exam- ple, if there are proprietary items that must be purchased from you or a particular designated supplier, then this needs to be disclosed in the offering circular. 8. Franchisee’s Obligations. The franchisee’s principal obligations under the franchise agreement are disclosed in a chart referencing 24 specific obligations. The chart also serves as a cross-reference for franchisees between the offering circular and the franchise agreement. The list attached as Exhibit A details the specific franchisee obligations that must be addressed in this chart. 9. Financing. Will the franchisor or its affiliates offer any direct or indirect financing arrangements to franchisees? Indirect financing includes guarantying franchisee loans and facilitating arrangements with lenders. If so, then the terms of the loan must be disclosed. 10. Franchisor’s Obligations. These obligations are broken down into two categories: obligations performed before the franchised business opens and ongoing obligations. a. Pre-Opening Obligations. How will the franchisor assist franchisees (if at all) in locating a site for the business, or in developing the site so that it is suitable for the operation of the franchised business? Will the franchisor hire and/or train franchisees’ employees? b. Ongoing Obligations. What assistance (if any) will the franchisor provide with: (i) develop- ing/improving the franchised business, (ii) operating problems encountered by franchisees, (iii) administrative, bookkeeping and inventory control procedures? Specific details about the franchisor’s advertising program and any computer systems or cash registers required to be used in the business must be provided. In addition, a training program must be developed that will be offered to franchisees and/or the franchisees’ manager. The training program should encompass instruction in the operation and manage- ment of a franchised business as well as instruction in the areas of advertising, marketing, personnel management, bookkeeping, inventory control and any other issues unique to the operation of the fran- chised business. In connection with the training program, the following must also be determined: (a) Who will bear the costs for said training? (b) Who will pay the transportation, lodging and other miscellaneous expenses associated with training? (c) How many people will be required to attend training and who will be required to attend (i.e., the franchisee, franchisee’s manager, franchisee’s employees)? (d) If additional designees of the franchisee attend, will there be a charge? (e) Where will training be held and what is the length of said training? (f) When will franchisee and its managers/employees be required to complete the training program (i.e., how many weeks prior to the opening of the Center)? The franchisor’s training program must be described in detail, including information regarding the location, duration, and a general outline of the training program. What topics will be covered? What materials will be used? Who are the instructors? Is training mandatory? 11. Territory. Will franchisees be granted an exclusive territory? Will there be conditions on exclu- sivity? Will franchisees be subject to performance standards? 12. Franchisee Participation. Are franchisees required to participate personally in the direct opera- tion of the franchised business? 13. Restrictions on Goods and Services. Are there any restrictions or conditions on the products that the franchisee may sell? For example, is the franchisee obligated to sell only those products ap- proved by the franchisor? 10376$ $CH5 10-24-03 09:37:33 PS 83 FEDERAL AND STATE REGULATION OF FRANCHISING 14. Renewal; Termination; Transfer; Dispute Resolution. (a) Term and Renewal. What will be the term of the franchise agreement? Will the franchisee be able to renew the agreement, and, if so, under what conditions? Will a fee be charged? Under what conditions may the franchisor terminate the agreement? Under what condi- tions (if any) may the franchisee terminate the agreement? (b) Termination. What obligations are imposed on franchisees after the franchise agreement is terminated or expires? Will the franchisee be bound by a noncompete agreement? Will the noncompete restrict the franchisees’ activities during and after the term of the agree- ment? What obligations (if any) are imposed on the franchisor after termination or expira- tion of the agreement? (c) Transfer. May franchisees assign or transfer the franchise agreement? If so, under what conditions? Will a fee be charged? Will the franchisor have a right of first refusal to purchase the franchised business before it can be transferred or sold to a third party? (d) Dispute Resolution. How and where will disputes be settled? (For example, must disputes be arbitrated? Will the arbitration or litigation take place in ?) Please note that some state laws limit the franchisor’s ability to enforce these provisions of the franchise agreement. 15. Public Figures. Will any public figure be involved in promoting or managing the franchise system? 16. Earnings Claims. Do you intend to include an earnings claim in the offering circular? 17. List of Outlets. Although there are currently no franchisees, information about any company- owned stores must be disclosed, including the locations of these stores over the last 3 years and projections about the number of additional stores to be opened in the next fiscal year and their locations. 18. Financial Statements. The financial statements required will differ depending upon which legal entity is selected to serve as the franchisor. If the franchisor is a newly established corporation or LLC, then it will at least need to include opening financial statements (i.e., an audited balance sheet). EXHIBIT A FRANCHISEE OBLIGATIONS a. Site selection and acquisition/lease b. Pre-opening purchases/leases c. Site development and other pre-opening requirements d. Initial and ongoing training e. Opening f. Fees g. Compliance with standards and policies; operating manual h. Trademarks and proprietary information i. Restrictions on products/services offered j. Warranty and customer service requirements k. Territorial development and sales quotas l. Ongoing product/service purchases m. Maintenance, appearance and remodeling requirements n. Insurance o. Advertising p. Indemnification q. Owner’s participation/management/staffing r. Records and reports s. Inspection and audits (continues) 10376$ $CH5 10-24-03 09:37:33 PS 84 FRANCHISING AS A GROWTH STRATEGY Figure 5-2. (Continued). t. Transfer u. Renewal v. Post-termination obligations w. Noncompetition covenants x. Dispute resolution ized. In all cases, however, the package of disclosure documents is assembled, consisting of an offering circular, franchise agreement, supplemental agree- ments, financial statements, franchise roster, mandated cover pages, ac- knowledgment of receipt, and the special forms that are required by each state, such as corporation verification statements, salesperson disclosure forms, and consent to service of process documents. The specific require- ments of each state should be checked carefully by the franchisor and its counsel. Initial filing fees range from $250 to $750, with renewal filings usu- ally ranging between $100 to $450. The first step is for counsel to ‘‘custom tailor’’ the UFOC format to meet the special requirements or additional disclosures required under the partic- ular state regulations. Once the documents are ready and all signatures have been obtained, the package is filed with the state franchise administrator and a specific franchise examiner (usually an attorney) is assigned to the franchisor. The level of scrutiny applied by the examiner in reviewing the offering materials will vary from state to state and from franchisor to fran- chisor. The sales history, financial strength, litigation record, reputation of legal counsel, time pressures and workload of the examiner, geographic de- sirability of the state, and the general reputation of the franchisor will have an impact on the level of review and the timetable for approval. Franchisors should expect to see at least one ‘‘comment letter’’ from the examiner re- questing certain changes or additional information as a condition of approval and registration. The procedure can go as quickly as six weeks or as slowly as six months, depending on the concerns of the examiner and the skills and experience of the legal counsel. The initial and ongoing reporting and disclosure requirements vary from state to state. For example, the filing of an amendment to the offering circular is required in the event of a ‘‘material change’’ (discussed in greater detail in Chapter 6); however, each state has different regulations as to the definition of a material change. Similarly, although all registration states re- quire the annual filing of a renewal application or annual report, only Mary- land requires that quarterly reports be filed. When advertising materials are developed for use in attracting franchisees, they must be approved in ad- vance by all registration states, except Virginia and Hawaii. (See discussion of advertising material requirements in Chapter 6.) All franchise registration states except Virginia require the filing of salesperson disclosure forms. Cali- fornia, New York, Illinois, and Washington require their own special forms. It is critical that the franchisor’s legal compliance officer stay abreast of all of these special filing requirements. 10376$ $CH5 10-24-03 09:37:34 PS 85 FEDERAL AND STATE REGULATION OF FRANCHISING Related Federal and State Laws Affecting Franchisors and Franchising Systems At any given time, Congress or state legislatures may be considering legisla- tion that has a direct or indirect impact on franchisors and the operation of franchise systems. Over the past 20 years, I have seen multiple varieties of ‘‘franchise fairness or franchise rights bills’’ by a particular member of Con- gress—usually at the urging of a specific constituent with a specific prob- lem—and the legislation eventually dies due to lack of interest by fellow legislators. Similar attempts at the state level have been introduced and de- feated and are typically perceived as having a ‘‘chilling effect’’ on fran- chising. At the federal level, legislation is often passed or considered that may have a direct impact on the franchisor’s system or require modifications to its manuals on operating practices, especially in the areas of health care re- form, wage and salary rules, pension regulations, workplace safety and ergo- nomics laws, tax laws, securities and accounting standards (see discussion of Sarbanes-Oxley law in Chapter 14), environmental laws, and related mat- ters. In addition, federal and state agencies may directly or indirectly regu- late the underlying industry in which the franchisor operates, such as in medical services, personnel agencies, financial services and cosmetology ser- vices. There may be legislation that affects the franchisor and the physical locations of all its franchisees, such as the passage of the Americans with Disabilities (ADA) Act in 1992. In response to the terrorist attacks on September 11, 2001, Congress passed the Patriot Act and approved the establishment of the Homeland Se- curity Department. Franchisors and their systems may be directly and indi- rectly affected in countless new ways—from new rules regarding food safety, handling, and security to the impact on travel and tourism to worker docu- mentation and privacy issues to the transfer and handling of funds in inter- national franchising transactions. The potential impact of additional terrorist attacks and global unrest should also be examined by franchisors from an insurance and operational perspective in order to determine which changes to the franchise agreement or operating systems ought to be made. The Patriot Act–An Overview The USA PATRIOT (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) Act (the ‘‘Patriot Act’’) was the U.S. government’s first legislative/regula- tory response to the 9/11 attacks and was signed into law on October 26, 2001. The Patriot Act is intentionally broad and amends numerous other U.S. statutes and regulations. It attacks terrorism on many fronts: the Act expands the umbrella of crimes that can be considered and penalized as terrorism; it increases or imposes anti-money laundering compliance responsibilities for certain types of financial institutions; it requires certain financial disclosure and reporting requirements for 10376$ $CH5 10-24-03 09:37:34 PS 86 FRANCHISING AS A GROWTH STRATEGY many U.S. businesses; and it provides for expanded investigative search and seizure capabilities including nationwide search warrants, roving wiretaps, broad Internet search authority, and secret subpoenas. The Patriot Act will potentially affect most franchisors, especially those with overseas operations. Regulations have been proposed or taken effect with respect to banks, mutual funds, operators of credit care systems, money services businesses, insurance companies, casi- nos, travel agencies, and businesses engaged in vehicle sales. More reg- ulations will continue to be promulgated as the Financial Crimes Enforcement Network (FinCENT) in the Treasury Department contin- ues to ‘‘follow the money’’ that may be used by money launderers or financiers of terrorism as it attempts to flow through the ‘‘paths of least resistance’’ (i.e., those paths that are the least regulated). By way of example, under the Patriot Act, all U.S. businesses are now required to report to the FinCENT all transactions in which they receive more than US $10,000 in coins or currency in one transaction or two or more related transactions. In addition, many U.S. businesses, not just finan- cial institutions, are beginning to receive subpoenas under the Patriot Act for business records relating to their customers, vendors, or em- ployees. At the state level, at any given time, one or more of the registration states are considering changes to specific sections of their regulations, which must be carefully monitored by current and prospective franchisors and their legal counsel and compliance officers. At the time that this third edition was being published, several states, including California, were in various stages of their rulemaking processes for changes in the areas of arbitration, earnings claims, and Internet advertising. State Taxation of Franchise Fees and Royalties The debate over whether the states have the power to collect income taxes from out-of-state franchisors on royalty and other income streams has been raging since the publication of the first edition of Franchising & Licensing in 1991. In the early days of the debate, the argument as to whether the out-of- state franchisor had sufficient presence or ‘‘nexus’’ in a given state to be subject to their state income tax laws typically was ruled in favor of the franchisor. However, in recent years, state governments have become much more aggressive—driven by a general frustration that so much untaxed busi- ness activity goes on within their borders simply because the company has no traditional ‘‘bricks and mortar’’ presence in the state. The advent and growth of the Internet and e-commerce has only compounded this frustra- tion, and franchisors have been pulled into the range of target companies and industries in an attempt to turn the tide of shrinking state budgets and grow- ing deficits. 10376$ $CH5 10-24-03 09:37:34 PS 87 FEDERAL AND STATE REGULATION OF FRANCHISING As the states become more aggressive, the legal interpretation of ‘‘nexus’’ seems to have shrunk to the minimum level of physical presence— even services-based franchise systems who do not have offices in a state or whose contracts with the state are limited to field support visits have been subject to state income taxes. This is an area of law that is evolving quickly and current and prospective franchisors should consort with their legal and tax advisors regarding the need to file state income tax returns. Since the Supreme Court has yet to rule on this issue or set a uniform set of standards, compliance must be reviewed on a state-by-state basis. As of the publication of the third edition, the following states have been particularly aggressive and/or successful in enforcing their state income tax laws against franchisors and should be given special attention: Florida, California, Oregon, New Jer- sey, Hawaii, Iowa, Louisiana, Massachusetts, North Carolina, Pennsylvania, New Mexico, South Carolina, and Wisconsin. 10376$ $CH5 10-24-03 09:37:35 PS [...]... will require initial and ongoing training for the franchisor’s sales and marketing personnel, the development of special forms and checklists, a management philosophy and compensation structure that rewards compliance and discourages noncompliance, a system for monitoring all registration and renewal dates, custom-tailored verbal scripts and video presentations that must be used and strictly followed... trademarks and service marks, trade dress (signage, counter design, uniforms, special design features, etc.), the know-how (usually codified in the operations manual, the initial training program, and the ongoing training and support programs), ongoing technical assistance and access to resources, and the right to manufacture or distribute the franchisor’s proprietary products and/ or branded merchandise... franchise agreement can and should reflect the business philosophy of the franchisor and set the tenor of the relationship A well-drafted franchise agreement will reflect the culmination of literally thousands of business decisions and hundreds of hours of strategic planning, market research, and customer testing The length, term, and complexity of the franchise agreement will (and should) vary from franchisor... is intended and what is not), and by serving as a type of due diligence for the franchisee and its advisors, evaluating the franchisor’s level of preparedness for the challenges and demands of the local market The scope of the rights to be granted is often quite broad (though advisors to the franchisor will often say that it is wise to ‘‘underpromise’’ and ‘‘overdeliver’’ in this area) and typically... program and the designation of a legal compliance officer and support staff are necessities, not luxuries, for the growing and established franchisor operating in today’s litigious society In all likelihood, the compliance staff will be ‘‘pitted against’’ the sales and marketing staff, with ongoing conflict and tension between the need to market aggressively and the need to market legally An attitude and. .. cost of the franchise and the franchisee’s expectations in relation to start-up costs, length of related agreements necessary to the franchisee’s operations such as leases and bank loans, and anticipated consumer demand for the franchised goods and services The renewal rights granted to a franchisee, if included at all, will usually be conditioned upon the franchisee being in good standing (e.g., no material... their relationship and therefore must maintain a delicate balance of power On one hand, the franchisor must maintain enough control in the franchise agreement to enforce uniformity and consistency throughout the system, yet at the same time be flexible enough to anticipate changes in the marketplace and modifications to the franchise system and to meet the special considerations or demands resulting from... presentations that must be used and strictly followed by the sales personnel, the development of a compliance manual and periodic policy statements, a special approval and renewal process for the award of new franchises, and a periodic random and ‘‘unannounced’’ inspection of the franchise sales and compliance files in order to ensure that procedures are 89 F R A N C H I S I N G A S A G R O W T H S T R AT... price and quantity to reflect gross sales) An earnings claim must include a description of its factual basis and the material assumptions underlying its preparation and presentation The catch-22 was created by the original strictness of these rules Prospective franchisees wanted to know what they were likely to earn, and franchisors wanted to tell them, but many franchisors could not meet the strict standards... business days before the first publication Oklahoma All sales literature and advertising must be filed with the administrator and approved prior to use A filing shall include the sales literature and advertising package, a review fee of $25, and a representation by the seller that reads substantially as follows: I, , hereby attest and affirm that the enclosed sales literature or advertising package contains . offers and sales being author- (text continues on page 84) 10376$ $CH5 10 -24 -03 09:37: 32 PS 81 FEDERAL AND STATE REGULATION OF FRANCHISING Figure 5 -2. Data to gather when implementing a franchising. assets) 20 . Certification of completion of basic training 21 . All ongoing material correspondence between franchisor and franchisee (postponing) 22 . Inspection reports–periodic and special visits 23 disclosure and reporting requirements for 10376$ $CH5 10 -24 -03 09:37:34 PS 86 FRANCHISING AS A GROWTH STRATEGY many U.S. businesses; and it provides for expanded investigative search and seizure