As of July 1, 2008, The New Franchise Rule will Provide Franchise Buyers with More Information

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As of July 1, 2008, The New Franchise Rule will Provide Franchise Buyers with More Information

By Jocelyn Chavez

The franchise industry has changed considerably even in the past few years, but the Federal Trade Commission (FTC) Franchise Rule that governs the industry hasn't undergone any changes since it was originally created in 1978. In an effort to streamline the Franchise Rule to make it more similar to the, Uniform Franchise Offering Circular (or UFOC - the official document franchises use to disclose information about their business to potential buyers), the Rule is undergoing a transformation. The amendments to the Franchise Rule  were announced in January 2007, and as of July 1, 2008 all franchisors are required to comply with the new regulations. As a result, prospective franchisees will have access to more information about the franchises they're considering buying than ever before.

Some of the 23 Items Included in the New Rule...

The purpose of the Franchise Rule document is to give prospective franchisees the information they need to evaluate the risks and benefits associated with investing in a particular franchise so they can make an informed decision. Under the Rule, franchisors must provide all potential buyers with a disclosure document containing 23 specific items of information  about the offered franchise, its officers, and other franchise owners. Some of the required disclosure topics include:

  • The franchise's litigation history including material lawsuits pertaining to the franchise relationship that have been filed by or against the franchisor.
  • Past and present franchise owners and their contact information.
  • The amended Franchise Rule requires disclosure of a franchisor's use of confidentiality clauses that prohibit or restrict existing or former franchise owners from discussing their experience with prospective buyers.
  • Any exclusivity of territories that comes with the franchise.
  • Assistance the franchisor provides its owners.
  • 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 included, as well as the material basis backing up those representations.

How is the New Rule Different from the UFOC Guidelines?

Although the new Franchise Rule  is similar to the Uniform Franchise Offering Circular (UFOC) guidelines, it requires franchisors to provide more extensive disclosure information regarding certain aspects of the franchise owner-franchisor relationship. Unlike the UFOC Guidelines, with the new Franchise Rule you'll have access to information regarding:

  • Lawsuits the franchisor has filed against owners.
  • The franchisor's use of "confidentiality clauses" in lawsuit settlements.
  • A warning when there is no exclusive territory.
  • An explanation of what the term "renewal" means for each franchise system.
  • The existence and identification of trademark-specific franchise owner associations that are either sponsored by or endorsed by the franchise system.

What it Doesn't Tell you:

In a few instances, the amended Rule requires Franchisors to disclose less information than the UFOC guidelines. For example, the new Franchise Rule does not require disclosure of "risk factors", franchise broker information, or extensive information about every component of any computer system that a franchise owner must purchase. Prior to entering into an agreement with a franchisor, it's important for you to learn as much as you can about the franchise opportunity and inquire about what is expected of you. For example, if you learn from a franchisor that you will need to purchase additional computer equipment to run your business, you can budget for that expense in advance.  

Exemptions:

The Franchise Rule  only applies to franchise locations in the U.S. or its territories. The new rule does not apply to franchise buyers investing $1 million or more initially or franchise buyers who have been in the business for at least five years and have a net worth of at least $5 million. Business opportunities will no longer be covered by the Franchise Rule, instead they'll be regulated by a separate Business Opportunity Rule  which was approved by the FTC in January 2007 and is currently in the process of being finalized. Business opportunities that were formerly covered by the Franchise Rule remain covered under an interim Business Opportunity Rule, until the revised proposed Business Opportunity Rule is enacted.

A Rule for the Future

In a reflection of the digital age, the amended Franchise Rule allows franchise companies to deliver the disclosure document to franchise owners electronically (via the franchisor's website, e-mail, or CD-ROM). The new rule also provides solutions to problems, inconsistencies, and inefficiencies that existed in the original Franchise Rule. When you are deciding which franchise is right for you, be sure to take the time to review the information that's provided in the Franchise Rule.

Make an informed decision. Learn more about the steps you should be taking and the important information you need to know about franchising before you buy.