What is the FTC Franchise Rule?

Q: What is the FTC Franchise Rule?

The FTC Franchise Rule is a federal regulation which requires franchisors to prepare an extensive disclosure document and give a copy of this document to any prospective franchise purchaser.

The sale of a franchise in the U.S. is governed by the Franchise Rule, a federal regulation enforced by the Federal Trade Commission (FTC) that requires a franchisor to provide disclosures to a prospective franchisee containing information about the franchisor (including the franchisor’s corporate structure and leadership, litigation and bankruptcy history), the franchise being offered (including the fees and costs to develop and operate the franchised business, a franchisee’s obligations to the franchisor, and the franchisor’s obligations to the franchisee), how much the franchised business may potentially earn, and other information about the franchise system, including existing franchisees and franchisees that recently left the system. The FTC provides information to prospective franchisees about purchasing a franchise, including its Consumer's Guide to Buying a Franchise and “Franchise Fundamentals” series through the FTC Business Blog.

The Franchise Rule is currently under review by the FTC, and IFA is working with its franchisor, franchisee and supplier members to develop recommended improvements to the Franchise Rule rooted in Article 11 of IFA’s Statement of Guiding Principles. IFA continues to work with Congress to ensure the Franchise Rule is reviewed and renewed. In November 2023, a bipartisan coalition of 15 members of the U.S. Senate urged the FTC to strengthen and improve the Franchise Rule. In the letter, the lawmakers outline three specific areas of improvement for the franchise model, including:

Provide greater visibility and transparency of key franchise terms and conditions;
Modernize franchise disclosures, including executive summaries to FDD’s; and
Encourage added dialogue through the promotion of independent franchisee associations and franchise advisory councils.

A similar letter was sent by more than 80 members of the U.S. House.

The sale of franchises also is regulated by certain states, including California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.