To ensure a full disclosure of all information relating to a franchise company prior to a franchisee taking on the business, franchise regulations have been put in place by the Federal Trade Commission (FTC). While the disclosure process is lengthy and should always include an experienced franchise attorney, there are basic guidelines to the regulations that a small business owner should be aware of when considering franchising options.
In addition to the FTC rules, though, many states have implemented their own individual franchise rules and minimum disclosure requirements. Their policies all incorporate the FTC regulations as explained below but add additional requirements — and especially registration forms — in order to franchise. When considering franchising, remember to contact your state offices to determine if they have separate regulations or forms you will need to be aware of.
Overview of the FTC Disclosure Rule
The basic disclosure rule requires a would-be franchisor to provide potential investors with a disclosure document, either at the first face-to-face meeting or within a minimum of 10 days prior to when any agreements are signed or money exchanged with regard to the franchise investment.
Earnings claims and/or forecasts are an important element of the disclosure paperwork. In order for a franchisor to make claims regarding his or her earnings (either historical or forecasted) there must be a justifiable basis for the claims and supporting documentation must be included in the disclosure paperwork.
In addition to earnings claims, there are many other items that must be disclosed. These include any fictitious names of the franchisor and any trademarks associated with the franchisor. Additionally, the legal standing of the franchisor’s directors must be disclosed in as much as they have been convicted of or plead guilty to any felony fraud charges during the previous seven years, settled in a civil suit regarding fraud charges, and/or filed for bankruptcy in the previous seven years
Franchisors are free to advertise their franchise and can provide investors with any promotional materials they wish, but no written or oral claims may contradict or fail to live up to the disclosure documentation, which is considered the ultimate indicator of franchise standings.
The FTC rule requires disclosure only. Unlike state disclosure laws, no registration, filing, review, or approval of any disclosures, advertising, or agreements by the FTC is required.
An experienced franchise attorney will be able to draw up disclosure paperwork that meets all legal requirements, and he or she should be heavily consulted during the initial franchising process.
The FTC rule primarily covers business-format franchises, product franchises, and vending machine or display rack business opportunity ventures. If there are any questions regarding how your business is classified, or what specific regulations apply to your situation, there are resources available on the FTC Web site.