As part of its recent 2014 Annual Conference, the North American Securities Administrator's Association, Inc. ("NASAA") formally adopted the Franchise Multi-Unit Commentary (the "Commentary"). The Commentary provides practical guidance for disclosing multi-unit franchising arrangements, which the NASAA and Federal Trade Commission had not previously addressed.  The date of adoption by NASAA was September 16, 2014 (the "Adoption Date"). Depending on the franchisor's or subfranchisor's status, the Commentary becomes effective on different dates:

  1. For franchisors or subfranchisors that do not have effective FDDs as of the Adoption Date, the Commentary becomes effective 180 days from the Adoption Date. Franchisors filing FDDs in registration states should be complying with the Commentary's guidance by the spring of 2015.
  2. For franchisors or subfranchisors that do already have effective FDDs as of the Adoption Date, the Commentary becomes effective 120 days after the franchisor's or subfranchisor's next fiscal year end.

The Commentary provides disclosure guidance for three multi-unit franchising structures that currently have no universal terms in the franchise industry. The Commentary adopts three common terms to describe these structures. The Commentary recommends franchisors use these terms to facilitate state administrators' review of FDDs.

Area Development

  • Definition:A person (an "area developer") who is granted, for consideration paid to the franchisor, the right to open and operate multiple unit franchises.
  • Governing Agreement: Area development agreement.
  • Common Terms:Delineates territory in which the area developer can open and operate franchises, specifies the number of units to be developed and a development schedule.

Subfranchise Rights

  • Definition:A person (a "subfranchisor") who is granted, for consideration paid to the franchisor, rights related to granting unit franchises to third parties.
  • Governing Agreement:Subfranchisor agreement (aka master franchise agreement). The subfranchisor–franchisee relationship is governed by a "subfranchisee agreement."
  • Common Terms:Specifies a territory in which the subfranchisor may operate, a minimum opening schedule, and often obligates the subfranchisor to provide support services to franchisees.

Area Representation

  • Definition:A person (an "area representative") who is granted, for consideration paid to the franchisor, the right to solicit or recruit third parties to enter into unit franchise agreements with the franchisor, and/or to provide support services to such third parties.
  • Governing Agreement:Area representative agreement. The area representative–unit franchisee relationship is governed by a "unit franchise agreement."
  • Common Terms:The area representative typically receives portions of the initial franchise fees and the continuing fees paid by unit franchisees.
  • State law considerations:Some states' franchise laws may consider an area representative to be a subfranchisor if it provides support services to third parties with unit franchise agreements. State laws differ whether an area representative must register as a subfranchisor with state franchise authorities.

Despite the NASAA Commentary's guidance, franchisors should check with state franchise regulatory authorities for conflicting interpretations. If a state franchise regulatory authority defines or specifically interprets a multi-unit arrangement differently from the Commentary, the state's interpretation controls.

Contributed by Alexander S. Radus

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.