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The FTC Franchise Rule: Explained

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The FTC Franchise Rule is designed to make sure that prospective franchisees have access to the full information that they need to make an informed decision regarding their potential business investment. Put another way, the FTC franchise rule is a disclosure requirement. It does not seek to interfere with the business relationships of franchisors and franchisees, other than to ensure that adequate information is exchanged.

At Pike & Lustig, LLP, our West Palm Beach franchise law attorneys have extensive experience handling FTC Franchise Rule inquiries. We know how to protect the rights of franchisees and franchisors in Florida. In this post, we outline the key disclosures that franchisors are legally required to make under this Federal Trade Commission regulation.

The Five Disclosures that Franchisors are Required to Make  

  1. The Basic Legal Structure of the Franchisor/Franchisee Relationship

Franchisors have a responsibility to ensure that all prospective franchisees have access to the information necessary to understand the legal structure of the proposed business arrangement. In some cases, franchise agreements can be incredibly complex, so franchisees should also ensure that they seek attorney review of the proposed terms of the deal. 

  1. Disclosures Regarding the Franchisor’s Financial Viability

Franchisees are required to rely on the long-term financial viability of their franchisor’s business. To ensure that franchisees have a fair opportunity to make decision as to whether or not they can trust a franchisor, adequate financial disclosures must be made early on in the process. 

  1. Full Disclosure Regarding the Franchisee’s Likely Investment and Operating Costs

Franchisors also have a legal duty to paint an accurate picture of the total cost of becoming a franchisee. This means that franchisors must clearly disclose information regarding the startup investment costs as well as all of the reasonably anticipated ongoing operating costs. Hidden fees and expenses may be construed as a violation of the FTC Franchise Rule. 

  1. All Relevant Terms and Conditions that Will Control the Franchise Partnership

Additionally, Florida franchisors must disclose any other terms and conditions that are materially relevant to the proposed business relationship. The Federal Trade Commission (FTC) looks down harshly on hidden clauses and non-disclosed terms. Franchisors must be sure that their franchisees have a legitimate opportunity to understand exactly what they are getting into before they sign on the dotted line. 

  1. The Names and Contact Information of Other, Similarly Situated Franchisees

Finally, franchisors must also provide all prospective franchisees with names and contact information of current or former franchisees that have operated under an identical or similar type of franchise agreement. This disclosure is important, as it gives franchisees an opportunity to do some personal, unbiased research into the investment before they come to a final decision. 

Speak to Our Florida Franchise Law Attorneys Today  

At Pike & Lustig, LLP, our dedicated franchise law attorneys represent both franchisors and franchisees. To learn more about what we can do for you and your company, please contact us now to set up your free, comprehensive initial legal consultation. Our firm serves communities throughout Southeast Florida, including in Miami-Dade County, Palm Beach County and Broward County.

Resource:

ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/franchise-rule

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