Franchise Legal ConsiderationsOne of
most important events in franchising is introduction of Franchise Rule on October 21, 1979 by Federal Trade Commission (FTC). The FTC Franchise Rule requires all franchisors operating anywhere in U.S. to make full disclosure of information that a prospective franchisee needs in order to make a rational decision about whether or not to invest.
In effect, rule obliges franchisors to meet certain FTC standards, such as ensuring that a reasonable basis for any claims exists, that disclosure has been prepared in accordance with accepted accounting principles, and that there is evidence to support financial claims, and that franchisee, among others, can see this evidence.
In particular, disclosure rule requires that franchisor provide information about:
(a) The franchisor and its affiliates, describing 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 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 franchise opens.
(d) Any restrictions on quality of goods and services used by franchisee and where they may be purchased, including restrictions requiring purchases to be made from franchisor or its affiliates.
(e) Any assistance available from franchisor or its affiliates in financing purchase of franchise.
(f) Restrictions on goods or services franchisees are allowed to sell and any restrictions on customers with whom they may deal.
(g) Any territorial protection to be granted franchisee.
(h) The conditions under which franchise may be repurchased or refusal renewal by franchisor, transferred to a third party by franchisee, and terminated or modified by either party.
