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toolsFranchise Rule
The Federal Trade Commission (FTC) has a regulation that impacts franchisors (the firm that operates the franchise network and sells franchises). It's called "The Franchise Rule". Here's what it is.
In the budding years of franchising, wild unsubstantiated, pie-in-the-sky claims were made by some franchisors and their salespersons in order to push franchise sales through. Stemming from years of franchisor abuses, the FTC implemented the Franchise Rule on October 21, 1979 in order to give some minimal disclosure to franchise buyers.
All franchisors operating in the United States must abide by the FTC’s Franchise Rule, which requires the franchisor to furnish franchise buying candidates with written disclosure on basic information about their franchise operations.
The Franchise Rule has a particular disclosure format. (To read more about what information the FTC says it should disclose, read here.)
Earnings
Earnings claims from past history or financial forecasts by a franchisor for a franchise buyer must have a reasonable basis as well as supporting figures in the disclosure document. The intent is that franchisors should not speak out of two-sides of their mouth by claiming one thing to a franchise buyer while their disclosure document says something else.
A franchisor can make earnings claims of a typical franchise in its advertisement, but if it does so it is required to do a little more than just showing a reasonable basis. The franchise rule states that the ad “must disclose the number and percentage of existing franchisees who have achieved the claimed results.”
Many franchisors elect not to make an earnings claims in their disclosure document.
No Government Monitoring
The FTC requires that franchise buyers are provided with a written disclosure but does not require a filing of such a document. That's done at the state level. Some states require a more specific format with additional information called a Uniform Franchise Offering Circular. There are some fourteen states as of this writing that require such a filing.
It should be noted that unlike a publicly held company’s quarterly and annual statements, there are no government accountants, lawyers or clerks who look at these documents for accuracy at the federal or state level. The accuracy is largely self-regulated by the franchisor. State offices simply check to see if the franchisor has filed the disclosure document and paid the relevant fees for the filings.
The disclosure must be given to a franchise buyer at least 10 business days prior to signing a franchise contract and accepting money. A franchise buyer must also receive a complete set of agreements covering all material points at least five days before. This “cooling off” period is meant to prevent franchise buyers from making hasty decisions by seeking professional counsel and to carefully considering what they are doing.
Additional readings for more details on the Franchise Rule:
