Why did the Federal Trade Commission enact the Franchise Disclosure Rule?

Question

What will be an ideal response?

Answer 1

ANSWER: In 1979, the Federal Trade Commission (FTC) established a Franchise Disclosure Rule that required franchisors to make full presale disclosure nationwide. This was amended in 2007 by the FTC to enact greater disclosure requirements from franchisors. From that amendment, a legal disclosure document entitled the Franchise Disclosure Document (FDD) must now be presented to prospective buyers of franchises in the presale disclosure process in the United States. It was originally known as the Uniform Franchise Offering Circular (UFOC).

The FDD underlies the franchise agreement (the formal sales contract) between the parties at the time the contract is formally signed. This franchise sales contract governs the long-term relationship and contains the only promises and obligations of the parties to each other that will remain in effect over the stated time term of the contracts—the terms of which generally range from 5 to 20 years. The contracts cannot be changed unless there is agreement by both parties.

Under the Franchise Rule, which is enforced by the FTC, a prospective franchisee must receive the franchisor's FDD franchise disclosure document at least 10 days before they are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. The prospective franchisee has the right to ask for (and get) a copy of the sample franchise disclosure document once the franchisor has received the prospective franchisee's application and agreed to consider it. The franchisor may provide a copy of its franchise disclosure documents on paper or electronically via email or over the web.

There are 23 categories of information that must be provided by the franchisor to the prospective franchisee prior to the execution of the franchise agreement.