FTC franchise rule

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The Federal Trade Commission (FTC) Franchise Rule is a disclosure rule that requires a franchisor offering or selling a franchise located in the United States of America to provide the prospective franchisee with the relevant information about the franchise.

Under Subpart B of the FTC Franchise Rule, the franchisor shall be in breach of the FTC Franchise Rule if it: (a) fails to furnish the prospective franchisee the disclosure document fourteen calendar days before the prospective franchisee signs the franchise agreement or makes any payment in connection with the franchise; or (b) if the franchisor unilaterally modifies the terms and conditions of the franchise agreement without furnishing the prospective franchisee with a copy of the revised franchise agreement at least seven calendar days before the prospective franchisee signs the revised franchise agreement. If the prospective franchisee initiated the negotiations that gave rise to the modifications of the franchise agreement the seven-day rule shall not apply.

According to Subpart C of the FTC Franchise Rule, along with other formalities established therein, the disclosure document the franchisor shall provide to the prospective franchisee must contain the following material information:

  • A cover letter indicating (a) the franchisor's name, type of business organization, principal business address, telephone number, and, if applicable, email address and primary home page address; (b) a sample of the primary business trademark that the franchisee will use in its business; (c) a brief description of the franchised business; and (d) the total investment required to begin the operation of the franchise.
  • The following 23 items of disclosure information: (1) the franchisor and any parents, predecessors, and affiliates; (2) business experience; (3) litigation; (4) bankruptcy; (5) initial fees; (6) other fees; (7) estimated initial investment; (8) restrictions on sources of products and services; (9) franchisee's obligations; (10) financing; (11) franchisor's assistance, advertising, computer systems, and training; (12) territory; (13) trademarks; (14) patents, copyrights, and proprietary information; (15) obligation to participate in the actual operation of the franchise business; (16) restrictions on what the franchisee may sell; (17) renewal, termination, transfer, and dispute resolution; (18) public figures; (19) financial performance representations; (20) outlets and franchisee information; (21) financial statements; (22) contracts; and (23) receipts. Detailed information about each item may be consulted in Subpart C of the FTC Franchise Rule.

Under Subpart E of the FTC Franchise Rule, seven exemptions apply to the FTC Franchise Rule. Among them, there are three threshold exemptions that the FTC adjusts for inflation every four years based on the Consumer Price Index. As of July 1, 2020, the following are the thresholds applicable to those exemptions from compliance with the FTC Franchise Rule:

  • Sales where the buyer pays less than $615 for the franchise.
  • Sales requiring a large investment where the franchisee pays at least $1,233,000, excluding the cost of unimproved land and any franchisor (or affiliate) financing; and
  • Sales to large entities, such as multi-unit franchisees, airports, hospitals, and universities that have been in business for at least five years and have a net worth of at least $6,165,500.

[Last updated in July of 2021 by the Wex Definitions Team]