In the United States, the Federal Trade Commission has oversight of franchising, rather than the US Securities and Exchange Commission. The FTC administrates oversight via the FTC Franchise Rule.
The FTC announced an update to the franchise Rule on January 23, 2007, becoming effective July 1, 2007. After July 2008, all franchisors in the United States are to use the Franchise Disclosure Document with potential franchisees.
The FTC Act empowers the Commission to prescribe rules that define with specificity acts or practices that are unfair or deceptive. One such rule is the Commission’s Franchise Rule.
The Franchise Rule requires franchisors to make material disclosures in five categories:
- Nature of the franchisor and the franchise system;
- Franchisor’s financial viability;
- Costs involved in purchasing and operating a franchised outlet;
- Terms and conditions that govern the franchise relationship; and
- Names and addresses of current franchisees who can share their experiences within the franchise system, thus helping the prospective franchisee to verify independently the franchisor’s claims.
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In addition, franchisors must have a reasonable basis and substantiation for any earnings claims made to prospective franchisees, as well as disclose the basis and assumptions underlying any such earnings claims.
Franchise agreements typically involve retail outlets that bear the franchisor’s trademark and follow the franchisor’s business operations model, such as fast-food restaurants, hotels, and automotive repair shops. These are commonly known as “business-format” franchises.
Franchise business opportunities rip offs often do not entail a trademark or detailed business plan. The franchise business opportunity typically promises to provide the buyer with equipment that is used to sell products or services to the public, such as vending machines, rack displays, pay phones, or medical billing software, and frequently promises to find the buyer a market for the products or services. Many business opportunities are outright scams that disappear shortly after taking consumers’ money. Compliance with The Franchise Rule by business opportunity sellers is low.
The Franchise Rule requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees.
Required Franchise Disclosure Document topics include: the franchise’s litigation history, past and current franchisees and their contact information, any exclusive territory that comes with the franchise, assistance the franchisor provides franchisees, and the cost of purchasing and starting up a franchise. If a franchisor makes representations about the financial performance of the franchise, this topic also must be covered, as well as the material basis backing up those representations.
Franchise businesses can create many tangled legal situations that are best made with the help of qualified experts like the team at Vukelja Law. Contact us today to get started!