People who are entering into a franchise should have comprehensive information so they can make an informed decision. This requires that the franchisor is transparent when they’re working with prospective franchisees.
One of the most important things to remember is that the franchisor must provide the Franchise Disclosure Document, which contains 23 points that are required by the Federal Trade Commission. This must be provided at least 14 days prior to any agreement being signed or money being exchanged. Some of the points that must be included are startup cost, restrictions on operations, financial performance and litigation history.
What is non-disclosure by a franchisor?
Non-disclosure occurs when the franchisor fails to share the information that’s required by the Federal Trade Commission. This can include providing misleading details, omitting facts or failing to provide the Franchise Disclosure Document.
The Federal Trade Commission’s Franchise Rule is designed to level the playing field between all potential franchisees. Investing in a franchise is a major investment, so there has to be trust between the franchisee and franchisor.
Non-disclosure is more than just missing paperwork. It can lead to enforcement actions by the Federal Trade Commission, as well as civil penalties. Franchisors can lead to fines, injunctions and rescission of franchise agreements. Some franchisees may be able to void the agreement and be awarded damages.
Franchisors must ensure they comply with the required disclosures, and franchisees must ensure they know what they have to receive. With both sides focusing on compliance, the chance of issues is reduced. Unfortunately, that doesn’t always happen. If there are issues with non-disclosure, both parties should ensure they have someone on their side who can assist them with these matters.