The federal Franchise Rule regulates certain requirements franchisors have regarding potential franchisees. On November 10, 2020, the Federal Trade Commission held a workshop to discuss changes to the Franchise Rule and other trade regulation rules. If you currently own a franchise, will proposed changes to the Franchise Rule have any effect on your business? We will look at the three issues covered in the November 10 meeting.
Financial Performance Representations
A majority of franchisors already include financial performance representations (FPRs) in their franchise disclosure documents (FDDs) to prospective franchisees. Proposed changes to the Franchise Rule could make FPRs mandatory.
People in favor of the change feel that the financial information contained in FPRs gives prospective franchisees important information.
Others argued that:
- Reliable information is not always available.
- Some franchisors would not be able to provide FPRs.
- People can just choose not to proceed with a franchisor if FPRs are not provided.
- Information can be obtained from other sources.
- Mandatory FPRs would increase costs.
- All industries do not use the same type of information for financial disclosures.
If you currently own a franchise, this change likely will not affect your business. However, you might be required to provide more information about your business operators to your franchisor so they can complete their FPRs.
Use of Disclaimers, Waivers, and Questionnaires
Current FTC rules do not allow franchisors to use disclaimers in their FDDs. However, FDDs can be more difficult to understand and easier to misinterpret without them. The FTC is considering allowing certain, specific disclaimers that only apply to certain businesses.
Integration clauses are also a point of contention between regulators, franchisors, and franchisees. An integration clause limits or prohibits a franchisee from suing a salesperson or franchisor for making false statements. Proponents of integration clauses say that a franchisor’s FDDs prevent an “information imbalance between franchisors and franchisees.” Others disagree, noting that such language prevents a franchisee from suing when representations are made but not included in the franchise agreement.
Finally, the FTC may be changing rules about questionnaires and acknowledgments. Prospective franchisees may be asked to complete questionnaires about the franchise process. Fearing reprisal from the franchisor, franchisees may provide false information rather than reveal a franchisor’s violations.
Formatting the FDD
The third proposed change involves changes to the current FDD format. A summary document may be added, but some feel that prospective franchisees would read the summary instead of the full FDDs. Also, some participants felt that adding hyperlinks and search functions would help franchisees deal with the lengthy FDDs.
Changes to the Federal Franchise Rules May Be Coming, But Some Things Stay the Same.
It’s still critical to review all documents with a business lawyer’s assistance, especially franchise agreements and other franchise-related documents.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.