The Amended Franchise Rule: Fulfilling the Reasonable Expectations of Prospective Franchisees

The Amended Franchise Rule: Fulfilling the Reasonable Expectations of Prospective Franchisees

The FTC's amended Franchise Rule helps fulfill the reasonable expectations of prospective franchisees by imposing stringent disclosure and other requirements on franchisors. These requirements help insure that franchisees make fully informed decisions but can be a trap for the unwary franchisor. Among other "traps" is the prohibition on any attempt to nullify FTC mandated disclosures by including broad merger clauses in the franchise agreement.

Excerpt:

The Federal Trade Commission's amended Franchise Rule requires franchisors to make numerous disclosures to franchisees before a franchise agreement may be entered into. The purpose of the Rule is to ensure that prospective franchisees make fully informed decisions about the purchase, given the enormous expense and expenditure of other resources typically involved in purchasing and operating a franchise.

The disclosure requirements are both exacting, and, in many respects, a trap for the unwary. Fortunately, the FTC has made the painstaking process easier by providing explicit instructions regarding both the disclosures that must be made and the manner of disclosing them. It is critical that counsel for both the franchisor and the franchisee understand these requirements. Failure on the part of the franchisor to abide by them could be construed as a deceptive trade practice; failure on the part of the franchisee to understand them could deprive the franchisee of important rights promulgated for his or her benefit. This analysis will highlight some of the more prominent aspects of the amended Franchise Rule that require special attention.

Background of the Amended Franchise Rule

The original FTC Franchise Rule was promulgated in 1978 as a result of findings by the FTC of "widespread deception in the sale of franchises." The overriding goal of the Franchise Rule was to "give[] prospective purchasers of franchises the material information they need in order to weigh the risks and benefits of such an investment." The Franchise Rule required franchisors to make material disclosures regarding the nature of the franchise; the franchisor's financial viability; the costs of opening and operating a franchise; the contractual terms governing the franchise relationship; and the identities of other franchisees who could provide useful information about their franchise experiences. [footnotes omitted]

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Comments

Anonymous
Anonymous
  • 03-15-2012

Well this is a great information for the people who are looking for developing their franchises business.Thanks for sharing and keep on updating the good work