Are You & Your Franchisees Violating the FTC Franchise Rule?


Sometimes a franchisor wants to pay a franchisee for helping sell a franchise.

But there are many potential problems, here. I want to point out just one and its solution.

Before furnishing an FDD to a prospect, you must confirm that both receipts at the end of the FDD identify all "franchise sellers" who have been or will be involved in offering the franchise to the prospect.

The receipts must state the franchise sellers' names, business addresses and business telephone numbers. Or, the receipts may refer to an exhibit containing the franchise sellers' names and contact information.

The meaning of the term "franchise sellers" is narrow for this purpose. The FTC wants the receipts to identify the persons who have been or will be dealing directly with the prospect, including key officers or employees and any broker. The FTC does not want the receipts to identify all persons who arguably might be franchise sellers in a broad sense, or to cross-reference lists of brokers or other persons who might sometimes represent the franchisor.

A few key persons who are involved in all or most franchise offers and sales for the franchisor may be pre-identified on all receipts. Other persons, such as brokers who deal occasionally with the franchisor's prospects, must be identified in typing or handwriting on the receipts, on a prospect-by-prospect basis.

Any person who, under a contract, will receive a sales commission or quota credit if a franchise is sold to the prospect must be identified.

This may be difficult to keep track of. What should be done if a franchise seller not identified on the receipts becomes involved with the prospect after disclosure has occurred?

When this happens, you or the franchisor must revise the dated and signed receipt previously obtained from the prospect so that the receipt identifies the new franchise seller, and must furnish a copy of the revised receipt to the prospect.

Revising the receipt may involve merely making a copy of the receipt with the new franchise seller's business card shown on the receipt or with information about the new franchise seller handwritten on the receipt. You and the franchisor are not required to have the prospect re-date or re-sign the receipt.

The cost of violating the FTC rule is $11,000 per occurrence per day.

The are a number of other risks when paying for franchisees to validate the franchisor's concept. Be sure to review your entire selling process with a franchise attorney with compliance expertise.

(This was the fourth post in a series of 11 posts on making compliant franchise sales.)

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Warren is making a good point, here.

Brent Alvord, in the recent National Restaurant News article, stated that he is using as many different franchise sellers as he can find on the internet, eschewing inside sales or franchise brokers. There is some attraction to this idea, but it has its risks.

Mr. Alvord, the CEO of Lenny's Subway, is quoted as saying:

"We extended a $10,000 cash reward to anybody who referred a franchisee who opens a store this year. We offered it to our internal people, our Facebook fans and all 120,000 members of our rewards card program.

The biggest source of good leads typically is our customers in our restaurants, because they're avid fans who love our food and talk to us when they're thinking about buying a business."

Warren correctly points out one compliance problem, and there are a host of other potential problems. Compliance with the FTC Rule on Endorsments is just one.

"The cost of violating the FTC rule is $11,000 per occurrence per day."

This is a do the math exercise no franchisor ever wants to calculate.

You can take steps to stay in compliance. And risky franchise sales gimmicks should be avoided.

  • user-pic Barbara Berschler | January 9, 2014 4:58 PM | Reply
  • There is always much paperwork to keep track of. I wonder if there are any electronic systems or "apps" that could make compliance of this sort a bit easier?

    Yes, I think there might be a solution for you. We should have some material out shortly.

    Leave a comment



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    About this Entry

    This page contains a single entry by Warren Lewis published on January 7, 2014 10:48 AM.

    The 4 Steps to Creating a Modern Franchise Owner's Group was the previous entry in this blog.

    Why Do Franchise Owners Really Fail? is the next entry in this blog.

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