Key Takeaways for Franchisors
- Outdated agreements and FDD errors are the top causes of franchise disputes and regulatory action.
- Advertising transparency and fee disclosure are under increased scrutiny by regulators.
- New federal and state laws require ongoing adaptation and legal review.
- Proactive legal counsel turns compliance from a burden into a strategic advantage for growth.
Running a franchise system offers tremendous opportunity, but it also comes with unique legal and compliance challenges. For franchisors, staying ahead of these risks is not optional, it’s essential to protecting the brand, maintaining healthy franchise relationships, and avoiding costly disputes. Too often, franchisors only bring in legal support after a problem surfaces, when options are limited and costs are higher. Working proactively with an experienced franchise lawyer helps franchisors prevent issues before they escalate.
Below are the top franchise compliance risks every franchisor should keep front of mind—and how to navigate them effectively.
1. Outdated or Incomplete Franchise Agreements
The franchise agreement is the backbone of any franchise system. It sets the terms of the franchisor–franchisee relationship, defines rights and obligations, and establishes protections for the brand. Yet, many franchisors allow these agreements to become outdated as laws, markets, and business models evolve.
Failure to update a franchise agreement can leave gaps that franchisees exploit or create inconsistencies with federal and state franchise laws. Outdated agreements may lack clarity on key issues such as territorial rights, dispute resolution, digital operations, system standards, or fee structures. These gaps can lead to inconsistent enforcement, legal challenges, or strained franchise relationships. Courts and regulators increasingly expect franchise agreements to reflect current legal standards and industry practices. Some states have also introduced new requirements around fee transparency, renewal terms, and operational control that must be reflected in the agreement itself—not just in the FDD or manuals. If these changes aren’t incorporated, franchisors may face enforcement actions or legal disputes.
An experienced franchise lawyer can help review and update agreements regularly, ensuring they remain enforceable, compliant, and aligned with business goals.
2. Franchise Disclosure Document (FDD) Errors
It’s vital to follow federal rules under the Federal Trade Commission (FTC) that require franchisors to provide an accurate, up-to-date Franchise Disclosure Document (FDD) before signing any franchise agreement. Common errors include misstated financial performance representations, outdated litigation disclosures, and missing or vague fee descriptions. These mistakes can result in enforcement actions, franchisee claims, or even rescission of signed agreements.
For example, fee transparency is a growing area of scrutiny. Franchisors must clearly disclose all fees—initial, ongoing, and conditional—including technology fees, renewal charges, required purchases, and contributions to marketing funds. Vague or hidden fees, especially those introduced through manuals or post-signing updates, may violate the Franchise Rule and trigger legal challenges. Regulators and courts are increasingly focused on whether fees are properly disclosed and justified, not just whether they appear somewhere in the FDD.
That’s why annual FDD reviews, guided by a franchise lawyer, are critical. Legal counsel can help ensure that each item in the FDD—especially Items 5 through 7 (fees and initial investment), Item 19 (financial performance representations), and Item 20 (outlets and franchisee status)—is accurate, complete, and aligned with current operations. Proper disclosure not only fulfills compliance obligations but also builds trust with prospective franchisees by demonstrating transparency.
3. Advertising and Marketing Compliance
Franchisors often require franchisees to contribute to a marketing fund or follow brand-wide advertising standards. Problems arise when the use of these funds is not transparent or when campaigns fail to comply with federal or state advertising laws. Common pitfalls include misleading promotions, unsubstantiated earnings claims, and inconsistent messaging across digital platforms. These issues can lead to franchisee complaints, regulatory investigations, and reputational damage.
Transparency is key—especially when it comes to how marketing funds are collected, allocated, and spent. Franchisees should have a clear understanding of what they’re paying for and how those funds support brand growth. The franchise agreement should clearly outline how advertising funds are managed, and franchisors should routinely audit campaigns for compliance with applicable laws, including truth-in-advertising standards and disclosure rules.
Legal counsel can also help create standardized marketing guidelines that franchisees can apply locally without running afoul of regulations. This includes reviewing promotional materials, earnings claims, influencer partnerships, and digital ad strategies to ensure they meet both legal and brand standards.
4. Failure to Adapt to Regulatory Changes
Franchisors must keep pace with evolving laws at both the federal and state levels. From amendments to the FTC Franchise Rule to new state-level regulations governing franchise brokers and business opportunity disclosures, the legal landscape is shifting rapidly. The proposed American Franchise Act, for example, aims to clarify the joint employer standard and reduce regulatory uncertainty for franchise systems. Meanwhile, states are increasingly scrutinizing franchise relationships, fees, and disclosure practices. A compliance strategy that worked five years ago may now be outdated, making ongoing legal review and adaptation essential for franchisors.
Failing to adapt exposes franchisors to lawsuits and reputational harm. Partnering with a franchise lawyer who tracks these developments ensures that agreements, manuals, and training programs stay aligned with the current legal landscape.
5. Dispute Resolution Gaps
No franchisor wants disputes with franchisees, but conflicts are inevitable. The question is how they are resolved. An agreement without clear mediation or arbitration clauses may force disputes into costly, drawn-out litigation.
A carefully drafted franchise agreement should include dispute resolution mechanisms that protect the franchisor while offering franchisees a fair process. This includes specifying the method of resolution, the governing law, and the jurisdiction in which disputes will be handled. By setting expectations upfront, franchisors reduce costs, minimize disruption, and preserve relationships.
As legal standards and enforcement trends evolve, franchisors should also revisit these provisions periodically to ensure they remain enforceable and aligned with current best practices. A franchise lawyer can help tailor dispute resolution clauses to reflect the franchisor’s operational realities and risk tolerance.
Why Proactive Legal Counsel Matters
What all these risks have in common is that they are easier and far less expensive to prevent than to fix. A franchise lawyer involved early in strategic planning can:
- Review and update franchise agreements regularly.
- Conduct annual FDD audits.
- Establish clear dispute resolution pathways.
Proactive legal counsel isn’t just about avoiding problems—it’s about building a stronger, more resilient franchise system. By investing in proactive compliance strategies, franchisors not only protect their brand but also strengthen their reputation as trustworthy, reliable partners. This credibility is invaluable in attracting and retaining quality franchisees.
Stay In Compliance
For franchisors, compliance risks are not abstract, they carry real financial, operational, and reputational consequences. From outdated franchise agreements to evolving labor laws, the challenges are constant. The difference between thriving and struggling often comes down to whether franchisors treat compliance as a proactive, ongoing responsibility or a last-minute scramble when problems arise.
Engaging an experienced franchise lawyer as part of your leadership team is not just a defensive move, it’s a strategic investment in growth, stability, and long-term success.
