Franchise Legal Considerations|
by Jim Brown
One of the most important events in franchising is the
introduction of the Franchise Rule on October 21, 1979 by
the Federal Trade Commission (FTC). The FTC Franchise Rule
requires all franchisors operating anywhere in the U.S. to
make full disclosure of the information that a prospective
franchisee needs in order to make a rational decision about
whether or not to invest.
In effect, the rule obliges franchisors to meet certain FTC
standards, such as ensuring that a reasonable basis for any
claims exists, that the disclosure has been prepared in
accordance with accepted accounting principles, and that
there is evidence to support the financial claims, and that
the franchisee, among others, can see this evidence.
In particular, the disclosure rule requires that the
franchisor provide information about:
(a) The franchisor and its affiliates, describing the
business experience of each of its officers, directors, and
management personnel responsible for franchise services,
training, and other aspects of its program.
(b) Any lawsuits or previous bankruptcies in which the
franchisor, its officers, directors, and management
personnel have been involved.
(c) Initial franchise fees and other payments required to
obtain a franchise, and a description of continuing
payments to be made after the franchise opens.
(d) Any restrictions on the quality of goods and services
used by the franchisee and where they may be purchased,
including restrictions requiring purchases to be made from
the franchisor or its affiliates.
(e) Any assistance available from the franchisor or its
affiliates in financing the purchase of the franchise.
(f) Restrictions on the goods or services franchisees are
allowed to sell and any restrictions on the customers with
whom they may deal.
(g) Any territorial protection to be granted the franchisee.
(h) The conditions under which the franchise may be
repurchased or refusal renewal by the franchisor,
transferred to a third party by the franchisee, and
terminated or modified by either party.
(i) Any training programs provided to the franchisees.
(j) Any involvement of any celebrity or public figures in
(k) Any assistance provided by the franchisor in selecting
the site for the franchisee.
(l) The number of present franchises, franchises projected
for the future, franchises terminated or not to be renewed,
and the number repurchased in the past.
(m) The financial statements of the franchisors.
(n) The extent to which franchisees must personally
participate in the operation of the franchise.
(o) The basis for any earnings claims made to the
franchisee, including the percentage of existing franchises
that have achieved the results claimed.
(p) The names and addresses of other franchisees.
This disclosure must occur at the first contact with the
franchisor, franchise broker, or anyone who represents the
franchise for sale, where the subject of buying a franchise
is discussed. The disclosure must be at least ten business
days before the signing of any franchise or related
contract or payment to the franchisor.
Although the FTC does not require registration from
franchisor, several states do have registration rules
requiring franchise sellers to register. Most states have
adopted the Uniform Franchise Circular Offering (UFOC)
guidelines for their disclosure requirements, but as a
potential franchisee, do not assume that if a franchise is
registered with the state or provides some type of full
disclosure document, you are protected from the possibility
of a failure or rip-off. You must use common sense and do
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