What Do Franchisors Have To Disclose To Franchisees?
Mesa Arizona Business Attorney Article On Franchise Disclosure
Franchise Law Disclosure Requirements
The requirements of the Federal Trade Commission’s Franchise Rule
The franchise industry is large and growing larger. The U.S. Census Bureau recently collected franchising data for certain industries and found that in those industries 10.5% of businesses were franchises and $1.3 trillion of the $7.7 trillion total sales were from franchises.[i] There is a lot of money in the franchise market, and it can be very lucrative for an individual with a successful business to franchise that business. However, in order to comply with the law and ensure long-term profitability, a franchisor needs to abide by the franchise rules and regulations set forth by the Federal Trade Commission – specifically the Franchise rule. The Federal Trade Commission has brought cases against hundreds of companies based on the Franchise Rules. An Arizona Franchise Attorney can help navigate the complex rules.
A key part of the Federal Trade Commission’s Franchise Rule is the Franchise Disclosure Document (FDD). The FDD is a legal document given to potential franchisees by the franchisor to disclose information on many areas of the franchise business. Use of the FDD was mandated by recent changes to the Franchise Rule, and it replaces the previously used Uniformed Offering Franchising Circular (UFOC). A franchisor is required to provide this document at least 14 days before a sale is made, as his Arizona franchise lawyer can tell him. The Federal Trade Commission’s regulations require certain specific information to be included in the FDD. The Franchise Rule contains 23 Items that must be included in the FDD. The following is a brief description of six of the Items:
– Item 2: Business Experience – The FDD must have the business experience over the previous five years of key individuals in the franchisor’s business. Key individuals usually include the franchisor’s directors, trustees, general partners, and principal officers.
– Item 5: Initial Fees – Any money that must be paid by the franchisee to the franchisor before the franchisee’s business opens must be disclosed. If the fee is not set, the possible range of the fee or a formula to determine the fee must be given.
– Item 12: Territory – The Franchisor’s FDD must specify whether the franchise is for a specific geographic location. The Franchise Rule contains specific language that must be included if the franchisor is not granting an exclusive territory. If the territory is exclusive, remedies must be given in case there is an intrusion into that territory, as stated in the franchise agreement negotiated by the Arizona business franchise lawyer. Any restrictions on the franchisor from soliciting or accepting orders from consumers inside the franchisee’s territory must be specified.
– Item 17: Renewal, Termination, Transfer, and Dispute Resolution – A table must be added to the FDD that outlines the franchise relationship. A brief description of required contract provisions must be included in the table.
– Item 21: Financial Statements – The franchisor must include a balance sheet and statements of operations, stockholders equity, and cash flows. These statements should be audited by an independent auditor and be completed according to GAAP (generally accepted accounting principles). There are specific exceptions for start-up franchisors, but even then audited financial statements should be provided as soon as practicable.
– Item 23: Receipts – The Franchisor’s FDD must have two copies of a detachable acknowledgement of receipt. The Franchise Rule contains specific language that must be used in the acknowledgement of receipt.
This is just a small sample of what must be included in the FDD. As can be seen, franchise law and the requirements for the Franchise Disclosure Document are evolving and complex. Having an experienced franchise attorney is essential if you are franchising your business or looking to buy a franchise. Attorneys at Gunderson, Denton & Peterson, PC are experienced in working with franchisors and franchisees on their franchising issues. Attorneys from the firm are available to meet with you to review and analyze the Franchise Disclosure Document or address any other franchise or business issue.
Written By Brad Denton
1930 N. Arboleda, Suite 201
Mesa, Arizona 85213
40 N. Central Avenue, Suite 1400-1532
Phoenix, AZ 85004
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