What is the FTC Franchise Rule?

The FTC Franchise Rule is a federal regulation which requires franchisors to prepare an extensive disclosure document and give a copy of this document to any prospective franchise purchaser. The disclosure document typically used to comply with the Rule is called a Franchise Disclosure Document (FDD), which replaced the prior Uniform Franchise Offering Circular, or UFOC, in 2008.  

The Franchise Disclosure Document contains categories of information about the franchise's operations such as required fees, basic investment, bankruptcy and litigation history of the company, how long the franchise will be in effect, a financial statement of the franchisor, and earnings claims. 

FTC Franchise Rule Under Review

The FTC Franchise Rule has been the primary federal regulation governing the franchise sector since 1978, requiring franchisors to provide essential information to prospective franchisees. The Rule is reviewed every ten years. In 2019, the Federal Trade Commission announced a formal review process for the rule and held a virtual public workshop as part of its regular review of its regulations and focused on three issues:  (1) Financial performance representations; (2) The use of disclaimers;  and (3) The format of the Franchise Disclosure Document.

While the FTC has not directly stated what, if any changes will be made to the FTC Franchise Rule, it is likely that modest revisions will be proposed.  It remains to be seen whether the FTC will adopt changes to the FTC Franchise Rule, and if so, the nature of the changes. 

IFA Advocacy

On September 10, 2020, the Federal Trade Commission (FTC) announced it would hold a Public Workshop to discuss its decennial review of the FTC Franchise Rule, the primary rule regulating the franchise business model. While the Workshop was held on November 10, the agenda sought to address the following three topics as related to franchise disclosure document (FDD) requirements: 1) Financial Performance Representations: What Should be Disclosed? And Why?; 2) A Discussion of Disclaimers, Waivers, & Questionnaires; and 3) The Pros and Cons of the Current FDD Format.

Leading up to the December 17, 2020 deadline to submit written comments to the FTC, the IFA circulated a brand sign-on letter, racking up 174 brands in support, and submitted to the FTC for review. Lastly, the IFA drafted more detailed comments to the FTC, addressing the three topics discussed at the FTC Workshop and detailing the potential consequences to the industry should any proposed changes be enacted.

On behalf of the franchise business model, these advocacy efforts have sent a strong and unified message to Congress and the FTC that significant changes to the Franchise Rule could undermine the success of the franchise model for franchisor and franchisee alike. 

Additional Resources

To learn more, the International Franchise Association has provided a helpful guide to understanding the most important items in a franchisor disclosure document.