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Can I choose to franchise only in Michigan?

Question: I want to franchise my restaurant, but only in Michigan.  Can I do that?

Answer: Yes, but you have to be very careful.  As we have discussed in previous columns, the offer and sale of franchises is regulated by the Federal Trade Commission and 15 various states, including the state of Michigan.  In order for you to sell (or offer to sell) franchises, you need to disclose to a prospective franchisee all of the risks associated with purchasing your franchise in a document that complies with the FTC’s Franchise Rule and the Michigan Franchise Investment Act.  This disclosure takes the form of a Franchise Disclosure Document (FDD).  So long as you have an FDD that complies with the FTC’s Franchise Rule and the Michigan Franchise Investment Act, you may sell (or offer to sell) franchises to Michigan residents for a franchise located in the state of Michigan.

The reason that you need to be very careful is that you may unexpectedly offer to sell a franchise to a person who may be protected by one of the other states that regulates the sale of franchises, such as Illinois, for example.  Consider the following situation.  A franchisee prospect contacts you from Grand Rapids asking you to purchase a franchise for operation in Grand Rapids.  This sounds like the perfect situation for you.  However, upon further investigation, this prospect is partnering with her parents, who are citizens of Illinois.  The parents are protected by the Illinois Franchise Disclosure Act, and in order to sell a franchise to them (or offer to sell a franchise to them), you must comply with Illinois law.  If you are not registered to sell franchises in Illinois, you are prohibited from selling to this group.

The sale of franchises can be tricky, and requires a keen eye on the identity of each investor, the state of residence of each investor, and the location of the franchise location.  All of the various jurisdictions involved may affect the sale of the franchise.

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At Fahey Schultz Burzych Rhodes PLC, we’ve been helping municipalities, franchised businesses, employers, and more with their legal needs since 2008. We’d love to learn how we can help you, too.