Franchise Surety Bonds
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What is a Franchise Surety Bond?
A Franchise Surety Bond is a surety bond that protects a government or state against loss due to a franchise holder’s failure to complete work specified in the franchise grant. A Franchise Surety Bond is a consumer protection device, for the benefit of the State and anyone purchasing franchise opportunities from a franchisor. The bond guarantees that franchisors will operate faithfully under any franchise disclosure acts, franchise agreements, and to offer franchises in that state within one year of registration.
HOW DO FRANCHISE SURETY BONDS WORK?
This bond is a 3-party guarantee among:
- Principal – franchisor
- Obligee – State
- Surety – surety bond company
The Principal and the Surety will partner in assuring the performance of the Principal to the Obligee. The Principal is primarily responsible for the fulfillment of the obligations required by the Obligee. If the Principal fails to do any of the obligations or any provisions stated in the Franchise Law and other relevant laws, rules, and regulations, the Obligee can file a bond claim.
A bond claim scenario will first be verified by the Surety. The Surety will investigate whether a violation has been made and if it’s covered by the bond, and if so, the Surety will pay the Obligee. Once the Surety has settled the claim, the Principal will reimburse the Surety for the payments made as a result of any bond claims.
HOW MUCH DOES A FRANCHISE SURETY BOND COST?
Your bond premium is calculated based on the bond amount, which is determined by the state(s) requiring the bond from you. Whatever the bond amount is, the bond premium represents only a small fraction of it. Typically, qualified surety bond applicants pay annual premiums based on 1% to 3% of the bond amount. This means that for a $200,000 bond, applicants with decent credit should expect an annual premium of $2,000 to $6,000.
Which states require Franchise surety bonds?
There are 14 states that require registration of a Franchise Disclosure Document. Of these 14 states, nine will require a review of the franchisor’s financial statements, and if the franchisor’s financial condition is not up to their standards, will impose financial assurance requirements on the franchisor.
The nine states that may impose financial assurance requirements on franchisors are:
- North Dakota
- South Dakota
Three common ways to satisfy a state’s financial assurance requirement are:
- Escrow initial franchise fees
- Defer initial franchise fees
- Purchase a surety bond to guarantee said fees
What bond amount is required?
The bond amounts vary by state and may be dependent on the number of franchise offerings you intend to make. We encourage you to check the applicable bond requirement in each state.
HOW CAN I GET A FRANCHISE SURETY BOND?
- Apply for the Bond(s)
Submit a form through our website or email your completed application for underwriting.
- Underwriting – The Three Cs
As part of the application, you will be asked to submit important information to assess your ability to fulfill the bond obligations:
- Your prior experience, or Capacity.
- Your credit score, history, and sometimes financial statements or Capital.
- Your trustworthiness and dependability, or Character.
To avoid delays, make sure that you gather the right information and complete your entire application, dates, and signatures.
- Bond Issuance
After your account is approved, the indemnity agreement signed, and payment received, the bond will be issued and sent to you to be filed with the State(s).
- Submit Bond to Obligee
After you receive your bond, it must be signed by you, and filed with the Obligee, or State, requiring the bond as part of licensure. The same hardcopy bond that leaves our office should be executed and forwarded to the ultimate recipient. Sometimes digital copies can be used, but more often than not, bond Obligees require the hardcopy original signed by both parties on file in their office.
For assistance with Franchise Surety Bonds, please contact Stephen Beahm:
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We like Franchise Surety Bonds because they capture the entrepreneurial spirit of America, and we look forward to helping you grow your franchise. Call, email, or submit this form to get in touch so we can get you the bond you need.