Franchising is a very appealing model to an entrepreneur who has dreams of business ownership but doesn’t want to go it alone. The concept of franchising has been around a long time. Historians say the U.S. business model dates back to the colonies when, in 1731, Benjamin Franklin and Thomas Whitmarsh entered into an agreement “for the carrying on of the Business of Printing in Charlestown in South Carolina.” You would think if nothing else, the longevity of this model would provide the security needed for this financial venture.
Although franchising seems like a safer prospect, it’s still a business investment, and with every investment there is some risk. That’s why, in 1971, the Federal Trade Commission (FTC) began creating rules governing franchising and continued revising as recently as 2007.
The disclosure rule requires any franchisor selling a franchise in the U.S. to provide the prospective franchisee with the relevant information about the franchise.
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.
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.
Compliance with federal mandates is something we take very seriously at AAMCO. We are exceedingly transparent with you as you begin the franchise process with us. We are a leader in the automotive repair industry and an iconic brand after being in business for more than 50 years. We are proud of the service we provide our customers and the effective business concepts we provide to our franchisees. With nearly 600 locations across North America, AAMCO is a trusted brand in the franchising industry.
If you’d like to learn more, request information to download our free franchise information report. We are happy to answer any questions you may have about AAMCO.