In its first major overhaul of its franchising regulations in nearly 30 years, the Federal Trade Commission is finally calling for greater disclosure by franchisors.
The FTC aims to insure that prospective franchisees “avoid harm” when considering a franchised business, the FTC said in publishing the revisions, which will become mandatory next year.
Under the revised franchise rule, confidentiality agreements preventing current or former franchisees from talking about their experiences would have to be disclosed. Regulators often recommend that would-be franchisees contact former or current franchisees to get their take on a business.
The FTC also wants franchisors to provide information about franchisee associations operating under a trademark, so prospective franchisees can learn more about the pros and cons of a system. Some examples of franchisee associations are: North American Association of Subway Franchisees NAASF, and Dunkin Donuts Independent Franchise Owners DDIFO.
Franchisors will now have to reveal lawsuits they brought against their franchisees under the revisions; the FTC’s original rule only required that franchisors disclose litigation filed by franchisees.
“The nature of the relations between the seller and the purchaser, as reflected in litigation, is of central importance” in assessing a major investment such as a franchise, the commission concluded. Other requirements include disclosure of exclusive territory.
Often franchisees think they won’t have to worry about another franchise opening up down the street, only to find that they’re not protected. “Taken together, each of these amended disclosures … will enable prospective franchisees to better assess the quality of the franchise relationship, and their likely success as franchisees,” the FTC said.
However, I am disappointed that the revised rule fails to require disclosure of a franchise’s financial performance. I think itâ€™s very important to the future success of franchising that more franchisors make financial representations and I believe it would have been a good time to require franchisors to make financial representations. Hopefully we wonâ€™t have to wait another 30 years.
The revised FTC rule becomes mandatory in July 2008, but franchisers may comply beginning July 1.
Cross Posted at Lets Talk Franchising