franchise rule

What You Should Know About Franchise Rule Before Investing?

The franchise business model is a different concept than normal trading. It has its own set of rules and regulations on which all the activities take place. Both the franchisees and franchisors have to comply with the Franchise Rule that is primarily enforced by the Federal Trade Commission.

The franchisor has to provide the Disclosure Document or FDD to all the franchisees with all the 23 items of information about the franchise business along with other existing franchisees.

History of Franchise Rule:

The FTC is the governing body for the Federal agency to look after the sale of the franchise in the United State since 1978. It also defined the franchise model along with requirements and rules to run the business. The requirements are known as ‘Franchise Rule.’

The rule was amended in 2007. Before the amendment took place, the FTC was acknowledged as adequate disclosure of the compliance of the franchisor with the disclosure guideline that has been recognized by the NASAA (North American Securities Administrators Association. The amendment of 2007 included the former Uniform Franchise Offering Circular or UFOC to create the latest version of the Franchise Disclosure Document.

Although this law is accepted in almost every state of the United State of America, there are a few states that have special relationship laws to control the association of the franchisors and International Franchisees.

What is the definition of a Franchise?

According to the Franchise Rule in Section 436.1(h), the definition of the Franchise is as follows:

“Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:​

  • The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;
  • The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and
  • As a condition of obtaining or commencing operation of the franchise, the franchisee makes a requirement payment or commits to make a required payment to the franchisor or its affiliate.”​​​
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The franchise relationship denotes not only the brand name and product or services of the company but the complete business format. And for that, the franchisors have to arrange the training, operating manuals, quality control and marketing strategy along with many other things.

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