Whether I am working with someone looking to buy a franchise or a franchisor looking to sell a franchise, there is a feeling of immediacy to getting the franchise agreement signed. The franchisee is excited about starting his/her business and the franchisor is excited about having a new franchisee on board. But hold it. The federal FTC rule and state laws require holding periods. Yes, holding periods. There are 2 holding periods, which must be observed when entering into a franchise agreement and the paying of any monies.
The first holding period under the FTC rule requires that the franchisee may not sign the franchise agreement, enter into any binding agreements, or pay any money or consideration until the prospective franchisee has had the franchise disclosure document (FDD) for 14 calendar days.
The second holding period requires that the franchisee must have all documents/agreements, which they must sign in to order acquire the franchise, in their possession with all blanks filled-in 7 calendar days before signing the agreements or paying any money. Having the blanks filled-in means the territory identified, the parties to the agreement listed, the initial fee stated, and all other elements of the agreement completed.
The holding periods may rule concurrently. For example, if the franchisor sends the franchise agreement with blanks filed-in at the same time that the FDD is given to the prospective franchisee, the 14 and the 7 day holding periods run concurrently, at the same time, and the franchisee may sign the franchise agreement when the 14 day holding period lapses.
Careful how you count! The day that the prospective franchisee receives the FDD or the agreement is day zero. You don’t begin counting until the next day. And, you cannot sign on the last day of the holding period; you have to wait till the next day. Say, for example, that the franchisee gets the FDD on the 1st, then the 14 day holding period runs till the 15th, and the franchisee can sign the franchise agreement on the 16th.
To make it even more complicated some states do not count in calendar days, but count in business days. Some states require 10 business days rather than 14 calendar days and 5 business days rather than 7 calendar days. It is all the same, except in the event of holidays. In the event of a holiday, in states that count using business days, the holding period extends for an additional day.
There is one more watch-out. If the franchisor makes a change to the agreements, then the 7 day holding period resets. The documents must be held for another 7 days. This is only true if the franchisor makes the changes. It does not apply if the franchisee requests the change and the franchisor just consents to the change as proposed by the franchisee.
So, what happens if the holding periods are not properly observed? If the holding periods are not observed, the franchisor could be responsible for reimbursing the franchisee for all the time and money paid and put in the franchise, not just initial franchise fees, but all money invested in the startup of the franchised business.