Every franchise sale in the United States runs through one federal regulation: the Federal Trade Commission's Franchise Rule, 16 CFR Part 436. It does not tell anyone whether a franchise is a good buy. It does something narrower and more useful. It decides what a buyer must be shown, and when, before any money moves.
The fourteen days
The rule's timing requirement is short enough to memorize. A franchisor must give a prospective franchisee its disclosure document at least 14 calendar days before the buyer signs a binding agreement with, or pays any money to, the franchisor or an affiliate (16 CFR 436.2). If the franchisor later changes the terms of the agreement on its own and in a material way, the buyer gets the final version at least seven calendar days before signing.
The fourteen days are a floor, not a schedule. They exist so that nobody signs on the day of a discovery visit, in the warm glow of a good presentation. Buyers who use the time well spend it making calls rather than rereading the brochure.
The document: twenty-three items
The disclosure document, the Franchise Disclosure Document or FDD, has a fixed structure of twenty-three items, set out in 16 CFR 436.5. Every franchisor fills in the same headings in the same order, which is what makes two systems comparable side by side. A few of them carry most of the weight for a buyer:
- Item 5 and Item 6: the initial fee and the recurring fees, including royalties and marketing contributions.
- Item 7: the estimated initial investment, as a range, with what each line covers.
- Item 11: what the franchisor commits to do before opening and while the business runs, including training.
- Item 12: the territory, and whether it is protected.
- Item 19: financial performance representations. A franchisor is not required to make one. If it makes any statement about what a unit earns or could earn, it has to be here, with its basis.
- Item 20: outlet counts over three years, including openings, transfers and closures, and contact details for current franchisees and those who left in the last fiscal year.
- Item 21: the franchisor's financial statements.
What the rule does not do
The Franchise Rule is a disclosure rule. The FTC does not review an FDD before it is used and does not approve franchise offerings. A complete, on-time disclosure says nothing about whether the business is sound. It only makes sure the facts needed to judge it were on the table.
Some states go further. A group of states requires franchisors to register their offering, and some set their own waiting periods or relationship rules. Those vary and change, so the current list belongs with a franchise attorney rather than with an article.
The view from each seat
The same document reads differently depending on where someone sits. A buyer reads Item 7 to see whether the money is enough. A franchisor writes it knowing that an understated range comes back as a struggling unit. A franchisee already in the system reads Item 20 to see who left and why. A master or area developer reads Item 11 and Item 12 to see what support and territory it is promising to people it will recruit.
That is why the most useful part of the document is the list of names in Item 20. A buyer who calls current owners, and the ones who left, hears the version of the system no one wrote down. The fourteen days are best spent on those calls.
Where to read more
The rule itself is short and readable at the Electronic Code of Federal Regulations. Rob Lancit has written about reading the document for Entrepreneur; this site's summary is at how to read an FDD.