| The Federal Trade Commission's Franchise Rule imposes certain requirements upon the advertising, offering, licensing, contracting, sale, or other promotion of a franchise. The requirements may be summarized as follows:
(1) Basic Disclosures. A franchisor must provide a potential franchisee with a disclosure document containing certain basic disclosures. The disclosure document must be provided to the potential franchisee at the first face-to-face meeting between the franchisor and the potential franchisee, or 10 business days before the potential franchisee pays any money or signs an agreement in connection with the franchise, whichever is earlier. The required disclosures include:
* the names, addresses, and telephone numbers of at least 10 previous franchisees who live closest to the potential franchisee;
* a fully audited financial statement of the franchisor;
* information about the background and experience of the franchisor;
* the cost of starting and maintaining the franchise; and
* an explanation of the responsibilities of the franchisor and the franchisee under the franchise agreement.
(2) Earnings Claims. If a franchisor makes historical or forecasted earnings claims, the claims must have a reasonable basis and written substantiation of the claims must be provided to the potential franchisee when the basis disclosures are provided.
(3) Advertised Claims. If a franchisor's advertisement contains an earnings claim, the ad must disclose the number and percentage of existing franchisees who have obtained the claimed results, along with cautionary language. The use of an ad with an earnings claim triggers the Rule's earnings claims disclosure requirements (explained above).
(4) Franchise Agreements. A franchisor must provide a potential franchisee with a copy of the franchisor's standard-form franchise agreement and any related agreements when the basic disclosures are provided. Final copies of the agreements must be provided to the potential franchisee at least five days before they are signed.
(5) Refunds. A franchisor must make refunds of deposits and initial payments to potential investors, subject to any conditions on refunds that are stated in the disclosure documents.
(6) Contradictory Claims. A franchisor's oral and written claims may not contradict any information in the required disclosure documents. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |