Are you considering expanding your business through franchising or investing in a franchise opportunity? Understanding federal franchise law is crucial for both franchisors and franchisees. The Federal Trade Commission mandates franchisors to follow specific franchise operating guidelines to protect consumers and franchisees.
Critical aspects of the franchise rule
Franchisors must give potential franchisees a Franchise Disclosure Document (FDD). They must provide this at least 14 days before any signing or payment. The FDD must contain the following information:
- Company history: Details about the franchisor, its leaders and past lawsuits, if any.
- Franchise costs: All fees, including startup costs and ongoing payments.
- Starting investment: An estimated initial investment to open the franchise.
- Sales rules: Must explain what products or services the franchisee can or cannot sell.
- Responsibilities by both parties: Outlines the obligations of both parties in the agreement.
- Business area: Details the franchisee’s territory and includes any exclusivity.
- Potential earnings: Income information if the franchisor chooses to share it.
- Franchise changes: Details how franchisees can end, renew or transfer the franchise.
These disclosures ensure transparency and help protect prospective franchisees. They also help prevent deceptive practices and promote fair business dealings.
Ensuring compliance
Franchisors must update the FDD every year. Failure to comply can result in significant penalties, including fines and legal action by the FTC. Both franchisors and franchisees need to understand these rules to protect themselves.
Franchising can be complex, but you can figure it out with help. Our experienced legal team is here to help you every step of the way. Whether you want to expand your business through franchising or are considering investing in a franchise, we provide the guidance and support you need to succeed. Contact us today for a free consultation.
