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A Big, Warm Welcome to the New Franchise Rule!

You've heard of the Uniform Franchise Offering Circular, or UFOC. This allows potential franchisees to weigh the pros and cons of any franchise offering. Well, as of July 1, 2008, the Federal Trade Commission finished phasing in its amended Franchise Rule by getting rid of the UFOC and instating the Franchise Disclosure Document. The FDD not only includes the UFOC disclosure requirements, but requires more extensive disclosure on some topics. This can be helpful for potential franchisees, with more transparency on the part of franchisors.

FTC LogoThe FDD will contain 23 items of information about the franchise, its officers and other franchisees, including information on the franchise's litigation history, past and current franchisees (and ways to contact them), the exclusivity of a territory, what assistance will be provided by the franchisor and the cost of purchasing and starting up a franchise. Information about the financial performance of the franchise will also be included.

The new federal Franchise Rule will be much more closely in line with state franchise disclosure laws and changes in franchise marketing and new technologies. The Rule also aims to reduce compliance costs and address franchisee complaints about the franchisor - franchisee relationship.

Let's examine what top areas require more extensive disclosure under the FDD:

  1. Lawsuits franchisors filed against franchisees
  2. Franchisors using "confidentiality clauses" during lawsuits
  3. Warning when there is no exclusive territory
  4. What "renewal" means for the franchise system

The biggest differences between the new Franchise Rule and the old UFOC requirements?

  1. Franchises and business opportunities now have separate requirements under the new Rule.
  2. More disclosure about earnings is encouraged, with information about business costs and financial results for a subset of franchisees (as opposed to results for the entire chain) available.
  3. The FDD can now be sent electronically.
  4. Disclosure of all the franchisee associations in their system (ones approved by the franchisor and independent associations).
  5. The corporate parents of a franchisor must be disclosed if its guarantees the business and/or provides supplies to the franchisees.

So now that this new Franchise Rule is in effect, look for that FDD in place of the UFOC ... and remember to read it carefully!

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