Federal Franchise Rule: How It Protects Franchisees
The Federal Trade Commission’s Franchise Rule, established in 1979, requires franchisors to provide prospective franchisees with a disclosure document, known as the Franchise Disclosure Document (FDD), containing information about the franchisor, the franchise system, and the contractual agreements involved. This rule aims to ensure transparency and enable informed decision-making for individuals considering franchise investments. It outlines specific requirements regarding the content and delivery of the FDD, including mandatory waiting periods before contracts can be signed, helping to protect prospective franchisees from fraudulent or deceptive practices.
The Franchise Disclosure Document
The Federal Franchise Rule requires franchisors to provide all potential franchisees with a disclosure document, known as the Franchise Disclosure Document or FDD, containing 23 specific items of information about the offered franchise, its officers, and other franchisees. Legally, franchisors must provide a copy of the FDD to prospective franchisees at least 14 calendar days prior to the franchise agreement being signed. The FDD is an integral part of the franchise sales process. To view AAMCO’s Franchise Disclosure Document, contact a sales representative.
Transparency
The federal franchise rule was crafted to provide the potential franchisee with proper background so they can make an informed decision and to circumvent any deception prior to sale of a franchise. Look at it like buying a house. Prior to the sale, the sellers must give necessary information to the prospective buyers to ensure there is no duplicity prior to closing. During the due diligence process, sellers need to reveal the roof leak and any financial liens on the house. It’s the time you disclose everything — good and bad.
That’s the point of the federal Rule. The FDD makes the business as transparent as possible. It contains information about the franchise’s operations such as required fees, startup costs, bankruptcy, and litigation history of the company, how long the franchise agreement will be in effect, a financial statement of the franchisor, and earnings claims.
The International Franchise Association, an advocacy and educational organization for the franchise industry, believes among the 23 items in the FDD, there are six sections of particular importance. Those include costs, franchisor obligations, renewal, termination, transfer and dispute resolution, financial performance representations, outlets and franchise information, financial statements, and contracts.
Current Review Process Under Way
The Federal Franchise Rule came under review again in 2019 to determine whether modifications are needed or if the Rule is even still necessary.
In November 2020, the FTC held a virtual public workshop on some areas of change that have been proposed by some parties to comply with technological and economic changes. The feedback was that the Rule was still a necessary protection in the business of franchising. Of interest was the subject of Cover Sheets. These sheets highlight topics of significance to prospective franchisees and were required by franchisors beginning in 2020. These will also be up for review by the FTC throughout the preliminary change process to the Federal Franchise Rule.
AAMCO Franchise Opportunity
AAMCO is a well-known automotive franchise specializing in car repair, especially transmissions. People trust them for their expertise in complex car repairs. AAMCO’s successful business model, along with training and support, gives franchisees a profitable and lasting chance for success.
The widespread national presence of AAMCO franchises underscores the brand’s scale and universal appeal. AAMCO is the top leader in transmission repair franchises. They prioritize customer trust, strategic marketing, and strong support for franchisees.
To learn more about starting a successful transmission repair franchise, request a free franchise information report.
