For those considering franchising in Texas, it’s important to understand both the Federal Trade Commission’s (FTC) Franchise Rule and the additional state-specific laws. The FTC’s “Franchise Rule” provides the foundation for franchise disclosure by requiring franchisors to provide every prospective franchisee with a Franchise Disclosure Document (FDD) at least 14 days prior to the signing of any binding agreements, commitments to pay initial fees, or payment of initial fees.
This FDD must contain 23 specific categories of information including the franchisor's corporate and litigation history, all expected fees and investments, obligations of both franchisor and franchisee, information on existing outlets, trademarks and patents, as well as audited financial statements. The goal is to educate franchisees on the investment opportunity and associated risks.
Key Requirements Under Texas Franchise Law
Texas has not enacted franchise-specific laws. Instead, Texas adopts the FTC’s rules governing franchisor conduct and proper disclosure of franchise documents. In lieu of franchise-specific laws, Texas has enacted “Business Opportunity Laws” that Franchisors must comply with in order to franchise in the State of Texas. If a Franchisor maintains a current FDD in compliance with the FTC rules, Texas Franchisors must file a one-time “Business Opportunity Exemption Notice” form (Form 2703) with the Texas Secretary of State. Unlike normal franchise-registration states, Texas Franchisors do not need to resubmit this form on an annual basis. So long as the Franchisor’s FDD is current and valid under the FTC rules, you can franchise in Texas after filing this Form 2703. If your FDD is not compliant under the FTC rules, your business opportunities exemption form will be considered invalid and you will be restricted from franchising in the State of Texas until your FDD is compliant.
In addition to the FTC Rule, the Texas Deceptive Trade Practices Act lays out private causes of action available to Franchisees who have legal grievances against their Franchisor.
Despite favorable franchisor laws in Texas, Franchisees have additional protections as well - they can form an Independent Franchisee Association to negotiate renewal terms or operational changes. Franchisees are also encouraged to communicate and relay their concerns, difficulties, questions, or comments to other prospective, current, or previous franchisees. Finally, franchisors face stiff penalties for violations ranging from fines to private rights of action that can include actual and punitive damages.
With Texas' strong pro-Franchisor statutory environment, it’s essential that those exploring opportunities educate themselves on both federal and state franchise rules from the outset. Pursuing the franchise pathway requires meticulous planning and an eye toward regulatory detail.
If you’re considering franchising in Texas, make sure to contact your attorney to ensure you understand the laws involved with your venture.