Federal Trade Commission Act
The Federal Commission Act (FTC) governs the commerce of a business, prohibiting unfair and deceptive practices. The FTC empowers the Commission to lay down the rules for prohibiting the use of unfair practices. One such rule is the franchise rule.
Under the franchise rule, the franchisors are required to disclose the following details:
Nature of the business and the system of franchising
The financial viability of the franchisor
The cost of purchasing and the operation of the franchised outlet
The guidelines that govern the relationship between the two parties involved in the franchise
Contact details of the present franchisee containing its name and address for reference
Even though the FTC does not require the franchisor to present its earning claim, however, franchisors are expected to have a reasonable explanation or an underlying basis to support their earning claim.
Under the FTC, the franchisor is also required to prepare a Franchise Disclosure Document (FDD) and disclose it to the franchisee before the franchise agreement is made. The FDD should contain 23 sections with detailed information as prescribed under the law.
Business Opportunity Laws
Businesses under the consideration of an expansion must comply with the business opportunity laws at both federal and state levels. While some state business opportunity laws may regulate the franchise directly, some laws might briefly impact the agreement and the sale of the franchise. Hence, such laws require state franchise registration along with the surety bond or other representation for financial security. According to the business opportunity law, business is defined as a commercial arrangement that should include the following:
The owner promoting other parties to buy their entry into a new business
The party, otherwise the franchisee, makes the required payment to get into the arrangement.
The franchisor presents the franchisee with the following:
Provide the location for the business; however, the devices used would be owned, leased, or paid for by the franchisee.
Provide the outlet and the customers or the accounts of the customers for the service provided by the franchisee.
Buyback the goods or services, the franchisee makes or provides limited or whole.
State Franchise Relationship Laws
Upon the completion of the contract of a franchise, the ongoing relationship between the franchisor and the franchisee is governed by the state franchise relationship laws stating its various objectives such as termination, market protection, and transfer.
The franchise relationship laws may require the franchisor to present with reasonable justification for the termination or the non-renewal of the franchise; this is in addition to the minimum notice period prior to termination.
In contrast to the franchise agreement, discussing the issue of termination or non-renewal, the state franchise relationship laws state detailed instructions regarding when and the circumstances under which the franchisor can terminate the agreement. Hence, making the termination or non-renewal of the agreement is difficult despite the terms in the franchise contract. Therefore, the franchisor needs to conduct thorough research on such franchisees.
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