The FTC Franchise Rule is the federal regulation designed to ensure that prospective purchasers of franchises have the material information they need in order to weigh the risks and benefits of such an investment. The Rule requires franchisors to provide potential franchisees with an FDD containing 23 specific items of information, including information about the franchisor, the franchisor’s directors and officers, the franchise opportunity offered, investment costs, fees, and other franchisees. In addition to the required items of the FDD, the FTC Franchise Rule outlines the proper sales process for selling a franchise and provides exclusions and exemptions in certain circumstances.
Your FDD is not approved by any federal government agency, although it is regulated by the Federal Trade Commission. Most people think the FDD is protection for franchisees, which is why it exists; however, in reality, the FDD protects the franchisor. If you want your contract to be enforced, the first level of inquiry will be: did you give your franchisee the information you were required by law to provide to them before they even signed? If that answer is no, your contract may be unenforceable.
It is important that you follow the law and develop a compliant FDD and sales process to prevent a franchisee from later alleging that they were defrauded. At some point, someone’s going to check, either when you go sell your entire system for millions of dollars or when someone knocks on your door with a subpoena.
Everyone wants to be able to defend themselves against a lawsuit, but a second significant reason why you should be 100% compliant with franchise disclosure and sales laws is in preparation of a private equity firm showing interest in purchasing your franchise system. Private equity will look at 100% of your agreements, 100% of your FDD files, and 100% of your state registration files. If you want to maximize your exit, you need to be in compliance.