What legal groundwork is needed to sell a franchise area in VA?
I work with a podiatrist who specializes in treating toenail fungus (NovoNail, LLC - www.novonail.com). We are looking to sell the Charlottesville area to an entrepreneur interested in opening up a minimum of 5 NovoNail branded nail spas. The entrepreneur (aka the Charlottesville Regional Representative) will then license and build out 5+ NovoNail nail spas in the Charlottesville area. There will essentially be two layers legally speaking, franchise the area to the rep, then license the spas in the area. What legal groundwork would be needed to do this?
Emma, you will need to do a few things to legally sell a franchise in Virginia.
1. Franchise Disclosure Document. This is required by both federal law and Virginia state law.
2. Unit Franchise Agreement and Area Franchise Agreement -- the Area Franchise Agreement will, of course, cover the area arrangement you mention above, and the Unit Franchise Agreement will be for the individual units.
3. The franchisor entity (the company that is selling the franchises) will need to have its financial statements audited by an independent CPA. I typically recommend setting up a separate legal entity to serve as the "franchisor," as it makes the audit less expensive.
4. Once it has items 1 through 3, the franchisor will need to register in Virginia to sell franchises. This is an additional layer that is required by some, but not all, states. Virginia is one of the states that requires registration before selling.
This is the very brief version of my answer to your question. I would be happy to discuss this with you in greater detail by phone, if you like (no charge, of course). I represent franchise companies from all over the country, including Virginia. Please feel free to contact me directly.
You probably need to consult with a VA franchise lawyer because each state has its own franchise regulations to comply with which I don't think a businessperson should try on their own.
You have to look at both federal and state law with respect to franchising. There is a need to provide adequate disclosures to potential franchissees.
There are also limits on offerings and qualifications for franchises. I would consutl a local attorney with franchise experience.
If you want to discuss this further, please feel free to contact me.
Developing a franchise program is a lengthy process and can take between 6-12 months to structure and document under the best of circumstances. Developing the structure and necessary infrastructure for a new franchise system is typically more time consuming and expensive than business owners realize. Careful planning and budgeting is critical.
First step would be to design a program structure (what you describe above including both a franchise and a license component may not be feasible).
Next step would be to develop a franchise program structure and documentation (including a Franchise Disclosure Requirement, template Franchise Agreement, and other ancillary agreements).
Next step would be to confirm status of the franchisor's intellectual property (e.g., the federal service mark registration for the "Novonail" name and logo.
One or more new entities would likely need to be set up through which to own and operate the franchise program.
Virginia is one of about a dozen so-called registration states, so you would be required to successfully navigate Virginia's registration and approval process before selling franchises in your home state. As noted by others, audited financial statements for the franchisor will be a necessary part of the FDD.
Virginia also has franchise "relationship laws" that will govern certain aspects of the franchisor-franchisee relationship (e.g., Virginia is the only state in the country that requires franchisors to negotiate with prospects over Franchise Agreement terms).
Happy to chat in more detail at your convenience.