The FTC and Franchising

Consider these powerful facts about franchising:

  • There are about 825,000 U.S. franchise business
  • 40.9 percent of all retail businesses are franchises
  • Franchising contributes 8.2 million direct jobs and 18 million indirect
  • Franchising adds $2.1 trillion to annual U.S. Gross National Product [GDP]

That’s the way it stands now but it was a long road getting there. Some of the most popular and well known franchises were created spanning many decades:

  • Howard Johnson 1925
  • Kentucky Fried Chicken 1930
  • Baskin Robbins 1948
  • Dunkin Donuts 1950
  • Burger King 1954
  • McDonald’s 1955

However, the success of these franchisors and others spawned some unfunded and poorly managed franchise ventures in the 1960s and 1970s. Some even bordered on fraud where money was taken from those eager to own businesses but a franchise was not delivered as promised.

FF pic IFA

The FTC and IFA

The federal government stepped in in the form of the Federal Trade Commission (FTC). Many regulations were added to bring full disclosure of what potential franchisees might be getting themselves into.

In addition, the International Franchise Association (IFA) was founded in 1978. It’s a reputable industry group where franchisor members use the IFA icon to show compliance with best practices and full disclosure. (In 1978, membership was only for Franchisors, today individual franchisees can join.)

Full Disclosure Documents

Also, the FTC created the Uniform Franchise Offering Circular (UFOC). This was updated in 2007 and is now called the Franchise Disclosure Document (FDD).

Along with the FDD, the business contract (Franchise Agreement) must also be included. Every franchise is governed by these two documents. In fact, if it’s not in the Franchise Agreement, it’s not an obligation.

 What’s in the Documents?

  • A legal description of the business & the term
  • Franchisee & franchisor obligations
  • All fees & payments
  • Detailed Lists of what is included with the fees
  • Statement of average unit sales (Item 19, optional)
  • Rights to transfer, expand & renew the franchise
  • Territorial rights
  • Signatures to the contract
  • Current & former franchisees list
  • Audited statement for the franchisor
  • And more…

Obviously, for potential franchisees these are must read documents. They are designed to make sure that everything is above board and the franchisee is getting good value at a fair price and that it’s something that can be verified.

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