Buying a franchise means signing a franchise agreement and paying fees before the business opens. Federal and Michigan law require the franchisor to provide a disclosure document first, and the timing rules give a buyer room to read it before committing.
The Federal Rule Sets a 14-Day Waiting Period
Under 16 CFR 436.2, a franchisor must give a prospective franchisee its current disclosure document at least 14 calendar days before the franchisee signs a binding agreement or pays the franchisor or an affiliate. If the franchisor unilaterally and materially changes the franchise agreement or related agreements, it must provide the revised agreements at least seven calendar days before signing. Changes that come from negotiations the buyer started don’t trigger that seven-day period.
Keeping the dates straight matters because a payment to the franchisor can come before the signing date. Each deadline is counted back from the signing or payment date, so a Sterling Heights franchise lawyer starts by confirming the date the document was received.
Michigan Adds a Separate Timing Rule
Michigan’s Franchise Investment Law, in MCL 445.1508, bars a franchise sale in Michigan until the prospective franchisee has received certain documents at least 10 business days before signing a binding agreement or paying consideration, whichever happens first. The documents include a disclosure statement, a notice on a separate sheet after the cover sheet, and copies of all proposed agreements. The notice states that Michigan prohibits certain unfair franchise provisions, which are void and unenforceable.
Both periods apply. Because the federal rule counts calendar days and the Michigan rule counts business days, a buyer should track both. A simple calendar that marks the date each document arrived, the date the buyer plans to sign, and the date any deposit is due keeps the two counts straight.
The Disclosure Document Has 23 Items
The federal format in 16 CFR 436.5 lists 23 items, from the franchisor’s background to a receipt page. Several deserve close attention:
- Items 3 and 4, which disclose litigation and bankruptcy history.
- Items 5 and 6, which describe the initial and other fees.
- Item 7, which estimates the initial investment.
- Item 17, which covers renewal, termination, transfer, and dispute resolution.
- Item 19, which covers financial performance representations.
- Item 20, which lists outlets and franchisee information.
- Item 21, which provides the financial statements.
- Item 22, which lists the contracts.
- Item 23, which is the receipt page.
A buyer can test the Item 7 estimate against a realistic business plan built for the new location. The estimate is only a starting point, and a buyer’s own numbers for the location, staffing, and working capital should be compared with it.
Contract Terms Deserve a Separate Read
The franchise agreement and its attachments govern the relationship for years, so the dispute resolution and termination terms in Item 17 deserve attention before signing. The same care applies to any business contract, and common contract drafting mistakes are worth knowing before signing one.
Disputes over fees, territory, or termination are among the problems a buyer may face after signing. The agreement’s dispute resolution terms set the path, and a Sterling Heights contract dispute lawyer reviews them.
Plan the Business Structure Before Signing
A buyer who plans to operate through a company can set it up before signing. The structure itself can be reviewed by a Sterling Heights LLC formation lawyer.
The franchise paperwork is only one part of opening a business. Buyers starting their first business also have startup steps to work through, and a Sterling Heights business startup lawyer can help put them in order.
At Gudeman & Associates, P.C., we serve small business owners, nonprofit organizations, agricultural businesses, and independent contractors. Our founder and managing attorney, Edward J. Gudeman, holds a J.D. from the University of Michigan Law School.
Use the Waiting Period
The waiting periods exist so that a buyer can read the document, compare it with the contract, and ask questions before any money changes hands. Prospective franchisees who have received a disclosure document can reach out to a Sterling Heights franchise lawyer to go through the items and the agreement together before signing.
