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Franchise Disclosure Rules

FTC 14-Day Rule

In 2007, the Federal Trade Commission (FTC) approved amendments to its Franchise Rules which became known as the “Amended Franchise Rule(s)." FTC regulations require that a franchisor distribute a complete Franchise Disclosure Document (FDD), with all exhibits, to all prospective franchisees prior to the first personal meeting to discuss the franchise and no less than 14 days prior to the signing of any agreement or the acceptance of any money. Any agreement is also defined as any form of a Letter of Intent (LOI) or legal acceptance.

It is important to note, the 14 days does NOT include the day the FDD is delivered to the prospective franchisee. Therefore a minimum of 15 calendar days should be used as a general rule as the first day a franchise agreement can be executed. The requirement also includes to all relevant agreements and documents along with the FDD.

FTC 7-Day Rule

In addition to the 14 Day Rule, the FTC also requires that no less than 7 days prior to the signing of any agreement or the acceptance of any money where there has been MATERIAL CHANGES made to the franchise agreement in favor of the franchisor, i.e. other than filling in names and dates.

If a franchisor however grants any kind of territory, then the 7-day rule will come into play. Therefore a minimum of 8 calendar days should be used as a general rule as the first day a revised franchise agreement can be executed. Please speak to your legal advisor about allowable agreement changes that can be made during the 7-day period.

Calendar Date Calculation

In calculating the appropriate time period for the FTC day rule, the day the franchise disclosure document was delivered or the day on which the agreement is signed or money is received is NOT applicable. For example, when following the 14-day rule, there must be an intervening period that includes 14 days in which NO ACTIVITY occurs.

Electronic Delivery

The amended FTC defines accepted methods for delivery of the required disclosures. Under the amended Franchise Rule the FDD may be hand-delivered, faxed, emailed or otherwise delivered by the required date. The franchisor may also furnish directions for accessing the document on the Internet by the required date. The franchisor can also send a paper or electronic copy (i.e. on disc) to the address specified by the franchisee by first-class USPS mail at least three calendar days before the required date.

State Regulations of Note

It is important to note that state laws may vary. New York and Rhode Island still enforce the first personal meeting rule for disclosure and New York, Rhode Island and Michigan still use business days instead of calendar days. The information above does not take those state exceptions into account.

No Broker Disclosure

The amended FTC franchise rule does not require the disclosure of franchise brokers. However, brokers remain subject to the prohibitions of the amended Franchise Rule. Thus, broker liability for false statements remains prohibited.

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