Franchise Rule Changes

Several years ago, the Federal Trade Commission announced that it intended to overhaul its Franchise Rule. It has now finalized those changes and they must be complied with by all franchisors no later than July, 2008.

Here are some highlights of what you need to know:

• UFOC is now the FDD - Uniform Franchise Offering Circular has become the Franchise Disclosure Document • Disclosure Delivery Rule – rather than the prospect receiving the disclosure document at the first personal meeting, it can now be delivered anytime as long as there are 14 calendar days before the franchisee signs any agreement or pays any consideration. E-Disclosure is now permitted as long as potential franchisees are advised of the different formats available and the franchisee must be able to store and print the version made available by the franchisor.

• Final Agreement Delivery Rules – the old “5 business day” rule has been eliminated. Now the form of agreement attached to the disclosure document serves as the final agreement for purposes of delivery. However, if the franchisor makes unilateral changes to the agreement, it must deliver the new version at least seven days before signing.

• The most significant change to the disclosure requirements is a completely revamped Item 20 (which shows changes in the number of system outlets over a three-year period). The new disclosure document mandates a fully reconciled tabular summary of the inflow and outflow of franchised and company-owned outlets over the course of each year. It also establishes a separate table for transfers, which ultimately do not affect the total number of operating outlets.The Rule also contains definitions of specific events and creates rules to avoid double-counting of those events. For example, if the franchisor terminates a franchise but then repurchases the outlet, those rules would focus on the “last-in-time” event, and, thus, it would be characterized as a repurchase.

• Earnings Claims are now called: Financial Performance Representations. The FTC has confirmed that it will not mandate the use of such representations in the disclosure document. However, the FTC has added specific preambles to Item 19, indicating that franchisors are allowed to provide financial performance representations and that prospects should not rely on unauthorized representations.

• No Protected Territory: If the franchisor does not provide any protected territory, the disclosure document must contain a warning legend about the franchisee’s lack of exclusivity and the possibility of competition from other channels of distribution.

So, what do all these changes mean to you if you are currently exploring franchise opportunities?

Possibly a more informative and streamlined process when you find a particular franchise that offers some serious probability for you. In addition to all these changes, depending on where you live, your state may have laws and regulations that franchisors must follow in your state. These laws may be in addition to the FTC rules.

There are currently 15 states that have imposed certain regulations for franchisors to operate in that state. They are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.

Certain other states require only a one-time or annual registration by the franchisor before they can bring franchisees on board who live in those states.

This article was written particularly for those who are currently exploring franchise opportunities or intend to do so in the near future. It behooves us all to stay current on laws and changes that may affect our future.



Franchise Rule Changes - To learn more about this author, visit Anne Barr's Website.

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