Franchise Laws: The Hidden Risk in Business and Finance Deals

Franchise laws are often overlooked in business transactions—but ignoring them can be costly.  If a business relationship includes all the elements of a franchise and isn’t properly registered, it can trigger serious consequences—including civil penalties, criminal charges, and personal liability.

What Makes a Franchise?

You don’t need to call it a franchise for the law to treat it like one. If your business arrangement includes:

1. the right to operate using some else’s the licensor’s trademark or branding
2. a required payment to the brand owner
3. a marketing plan suggested or required by the brand owner by the licensor

then you may be operating a franchise—even if you didn’t intend to.

Courts regularly impose liability on brand owners if all franchise elements are present. Clever contract drafting won’t shield brand owners from liability if the deal checks all the legal boxes, because state-level statutes protect franchisees by invalidating any clause in an agreement that forces them to give up or “waive” their legal rights under that state’s franchise law.

Why It Matters in Transactions

In business sales or financing, sellers or borrowers often provide warranties (and sometimes legal opinions) confirming compliance with all applicable laws. A typical warranty might read:

“Seller has complied with all material federal and state laws in the operation of its business and is authorized to operate its business as currently conducted.”

If a brand owner whose business relationships include all the elements that make it a franchise in a franchise registration state, but hasn’t registered accordingly, that warranty may be false—or impossible to give. Worse, listing franchise law violations as exceptions to warranties could amount to admitting a crime.

What Lawyers and Dealmakers Should Watch For

Transactional attorneys and deal professionals need to be alert to franchise law triggers. If a brand owner’s business model resembles a franchise, it’s critical to assess compliance before drafting warranties or issuing legal opinions. The stakes are high—and the consequences of getting it wrong can be severe.