The Federal Trade Commission’s new disclosure rules for franchisers should help would-be franchisees make more-informed investment decisions.
The revisions, which took effect July 1, bring the regulations into the electronic age. Now franchisers can file disclosure documents online, eliminating the need for an in-person meeting.
Franchisers will have to list any lawsuits they’ve filed against franchisees in the past year. Previously, only franchisee-initiated litigation had to be reported. That means, for example, that a franchiser suing to collect late royalties from franchisees — a possible indicator of a financially troubled chain — would have to make that public.
Also, a potential franchisee “wants to know if he or she is getting into business with someone who’s just litigious,” says Lois Greisman, the director of the FTC’s Division of Marketing Practices, who oversees franchising for the agency.
The revised regulations simplify how franchisers report franchise turnover, transfers and terminations for the past three years, which, again, should make a potentially troubled franchiser easier to spot.
“Under the old rule it was fairly easy to disguise store failure from a new franchisee coming in,” says Carmen Caruso, an attorney who handles franchising cases at Stahl Cowen Crowley Addis LLC in Chicago.
Franchisers now must disclose whether a franchisee will be given an exclusive territory in which to do business. And the existence of confidentiality agreements that limit what current or former franchisees can say about their experiences must be revealed.
Some franchisees’ attorneys and advocates are unhappy
