What is Franchise Compliance?
Posted on January 18, 2011 by My Franchise Law
Operating a franchise requires ingenuity as well as conformity. The creativity is unique to each franchisor, but the laws governing the franchise industry are created by a bureaucracy within the United States government. To ensure fair play and uniformity within the franchise industry, the Federal Trade Commission (FTC) has created rules and guidelines that all franchises must follow under penalty of law. Originally implemented in October 1979, and amended July 2008, these rules are for the protection of the franchisor and franchisee making sure that vital information is disclosed. The amended Franchise Rule is the only format that can now be used, and it dictates what is expected of the franchisor. Here are the key components of the amended rule.
Each franchisor is required to give prospective franchisees material information prior to them becoming a franchisee. This means that a potential franchisee will need to receive background information, business costs, legal obligation of both parties, company statistics and audited financial information about the franchise business. These mandatory records are a safeguard against you being accused of hiding chief aspects of your franchise from those who might want to become a franchisee. This way, a franchisee will be unable to claim ignorance of financial risk with regards to the business and assert that they didn’t have the whole story. Likewise, this precedent lays out what a franchisee can expect from you (building maintenance, product quality, etc.) so that you only have to supply what is in the agreed-upon terms, and the franchisee will know exactly what to expect.
In addition to the obligatory records every franchisor must provide, you might also choose to supply potential franchisees with disclosures and substantiation for financial performance representations. It’s not enough to make claims about company earnings. If you decide to publish financial performance representations about your franchise, the FTC will require that you provide credible evidence to support your statements. Like the previously mentioned required documents, these voluntary disclosure proclamations give franchisees a glimpse into their potential earnings and average sales if they decide to join your company. And, depending on how well your business franchise is represented in your financial performance papers, providing this information might be a useful tool to entice potential franchisees.
Contacting a franchise lawyer should be your first course of action when determining if your franchise is complying with FTC guidelines. They will review, or draw up, the necessary papers following governmental statues to the letter. They will also help you decide which legal obligations to take on, and which to leave to the discretion of your franchisees. And, based on your franchise’s portfolio, a franchise lawyer can recommend whether or not you should consider offering a voluntary financial disclosure record.