Three Important Things Your Franchisor Cannot Say Outside their FDD

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The FTC franchise rule prohibits a franchisor from including any information in an FDD that is not required by the rule or state laws or regulations. The rule contemplates, however, that there will be times when a franchisor will want to provide a prospect with supplemental material information, or even will be required by other federal or state laws to provide a prospect with supplemental material information.

Supplemental information could include, for example, background in- formation on the franchisor's executives or on litigation not required to be disclosed in an FDD. 

Supplemental information may be required to be filed as "advertising" with certain states before being used, see permitted advertising.

Supplemental information is prohibited from contradicting information in an FDD, see "Prohibited 3: Information Contradictory to Information in FDD" below. 

Prohibited 1: Disclaimers or Waivers of Representations in FDD

You must not disclaim or require a prospect to waive reliance on any representation made in the franchisor's FDD, including any exhibit in the FDD. The only exception to this prohibition is when a prospect voluntarily waives specific contract terms or conditions in the course of negotiation (see "Permitted 6: Negotiation" above).

The franchisor must make sure that its franchise agreement and oth- er agreements do not contain provisions requiring a new franchisee to acknowledge reliance only on representations in the agreements. This type of provision is prohibited, since it requires a prospect to waive reliance on other representations in the franchisor's FDD. 

Prohibited 3: Information Contradictory to Information in FDD

You and the franchisor must avoid making any claim or representation to a prospect, orally, visually or in writing, that contradicts any information in the franchisor's FDD.

For example, if Item 7 in the FDD states that the initial investment ranges from $100,000 to $180,000, you are prohibited from stating orally to the prospect that the initial in- vestment often is less than $100,000.

Or, if Item 5 of the FDD states that the initial franchise fee is non-refundable, you are prohibited from stating orally to a prospect that the fee is refundable in some situations. 

Prohibited 4: Use of "Shills"

You and the franchisor must avoid referring a prospect to a "shill." A "shill" is any person misrepresented by you or the franchisor to be the purchaser of a franchise from the franchisor or the operator of a franchise of the type offered by the franchisor, or to be an independent and reliable source about the franchise or the experience of any current or former franchisee.

The prohibition on the use of shills applies to individual shills who are paid or otherwise compensated to provide false favorable testimonials or fictitious references to prospects, and to institutional shills that are paid to purport to act like Better Business Bureaus providing consumers with "independent" reports on their members. 

 If you would like to know if you can franchise your business, connect with me on LinkedIn and give me a call.

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About this Entry

This page contains a single entry by Warren Lewis published on June 18, 2013 3:03 PM.

Why Famous Film Franchises are fleeing Hollywood for Las Vegas was the previous entry in this blog.

7-Eleven Denies Franchisee Partners Fair Share of Tax Refunds - Court Agrees is the next entry in this blog.

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