Starting a Franchise in Maryland
Franchising is a great way for entrepreneurs who have created a strong brand to monetize their business model without the broad scope of liabilities associated with operating the business themselves. A franchisor is not the actual owner of the business bearing its name, so, for example, if the business owner is negligent, the harmed person will likely only sue the business owner and not the franchisor.
Franchising also helps franchisors grow their brands faster than they could independently, as the franchisee is responsible for securing financing, the business location, and staffing.
In the blog, we will discuss what an entrepreneur must do to start a franchise in the state of Maryland.
As a starting point, franchisors must comply with the requirements of the Maryland Franchise Act, which addresses and controls any offer to sell, or the sale, of a franchise. The state aims to protect the public, so the failure to abide by the obligations and requirements of the Act can result in significant civil and criminal penalties, so don't take these requirements lightly.
Under the Maryland Franchise Act, a franchise is defined as an agreement in which:
a purchaser is granted the right to engage in the business of offering, to sell, or to distribute goods or services under a marketing plan or system prescribed in substantial part by the franchisor;
the operation of the business under the marketing plan or system is associated substantially with the trademark, service mark, trade name, logotype, advertising, or another commercial symbol that designates the franchisor or its affiliate; and
the purchaser must pay, directly or indirectly, a franchise fee.
In short, for there to be a legally binding franchise agreement in the state of Maryland, entrepreneurs must show the following three elements:
The most important thing when trying to sell a franchise, franchisors must have a reliably profitable marketing plan. Potential franchisees want to ensure that the investment in a franchise will almost guarantee a return so that the marketing plan will be a major selling point. In addition to prospective franchisees, the state also requires that this document be part of any legitimate franchise agreement.
Examples of things that marketing plans usually include:
Price specification, special pricing systems, or discount plans;
Sales or display equipment or merchandising devices;
Promotional or advertising materials or cooperative advertising;
Training regarding the promotion, operation, or management of the business; and
Operational, managerial, technical, or financial guidelines or assistance.
The Maryland Franchise Act requires that the franchisee’s business be “associated substantially” with the franchisor’s trademark, service mark, trade name, logotype, advertising, or another commercial symbol that designates the franchisor or its affiliate be considered a franchise.
Franchise agreements are required to include the payment of a franchise fee. The Act defines a franchise fee as a charge or payment that a franchisee or sub franchisor is required or agrees to pay for the right to enter into a business under a franchise agreement.
This requirement is relatively straightforward, but there can be some nuisance in how the fee is paid. Discuss with an attorney what qualifies as a “fee” under the act, as there may be more beneficial ways to structure the agreements.
The Securities Division oversees the franchise registration process and enforces the Act. Before offering to sell, or actually selling, a franchise, one must register the offer of the franchise with the Securities Division of the Maryland Attorney General’s office.
Franchisors will have to pay a fee and provide a document called a "prospectus" to the attorney general's office to register. Maryland also requires submitting a copy of any advertisement regarding the franchise to the Commissioner for review at least five business days before the publication of the advertisement.
The franchise prospectus is one of the essential documents that all franchisors must have and actively update. Prospectives must be provided to both the Attorney General’s office and target franchisees. Interested parties will want to know that the business is healthy and there is a clear plan for success in the future.
Also, as a way to protect the public, Maryland requires by law that a franchisee must receive a copy of the offering prospectus and each proposed agreement relating to the sale of the franchise before the deal may close.
A prospectus should include information about the franchise and its operations, including general business information, the owners’ backgrounds, financial statements, franchise agreement, other franchises, and more.
Franchisors are required to maintain a complete set of records for all offers and sales of a franchise for a period of five years. The State has the right to examine a franchise's records if they believe that it is necessary or appropriate in the public interest or to protect prospective franchisees.
The process of starting a franchise requires creativity, hard work, and proper guidance. It is important to retain competent legal counsel when preparing the state registrations and preparing a franchise's agreements to ensure a smooth experience.
Md. Code Ann., Bus. Reg. §14-201 - 225
COMAR § 02.02.08