Federal Trade Commission (FTC) Franchise Rule & Compliance Requirements

Franchising in the United States is regulated primarily through the Federal Trade Commission (FTC) Franchise Rule, a federal regulation designed to protect buyers by ensuring transparency and consistent disclosure practices. This rule requires franchisors to provide detailed information before any contract is signed or money changes hands.

The FTC Rule does not regulate how a franchise must operate; instead, it governs how franchisors must disclose information so buyers can make informed decisions.

What the FTC Franchise Rule Covers

The FTC Franchise Rule focuses on pre-sale disclosure requirements, ensuring prospective franchisees receive accurate, complete information about the franchise system. Its purpose is consumer protection—reducing the risk of misleading claims, hidden fees, or incomplete information.

The rule governs:

• The Franchise Disclosure Document (FDD) format and content
• The timing of delivery (mandatory 14-day review period)
• What franchisors can and cannot say about financial performance
• Requirements for consistency and accuracy in all disclosures
• Penalties for non-compliance

It applies to any franchise offered or sold in the United States.

The 14-Day Rule

A core element of the FTC regulation is timing. Franchisors must give prospective buyers the FDD at least 14 days before:

• Signing a franchise agreement, or
• Paying any fees

This cooling-off period ensures buyers have enough time to review the FDD, consult advisors, and ask questions before making a long-term commitment.

Financial Performance Claims Requirements

If a franchisor chooses to share any financial information—revenues, margins, profits, or other performance indicators—it must:

• Appear in Item 19 of the FDD
• Be backed by reasonable, documented data
• Be presented consistently across marketing materials

If no Item 19 is provided, the franchisor cannot make verbal or written claims about how much a franchisee can earn.

What Must Be Included in the FDD

The FTC Rule requires franchisors to disclose 23 Items, such as fees, obligations, litigation history, territory terms, financial performance representations, and historical outlet growth.

These Items must follow a standardized structure so buyers can easily compare brands.

Annual Updates and Accuracy Requirements

Under the FTC Rule, franchisors must:

• Update the FDD annually
• Update financial performance data as needed
• Amend the document if there are material changes (such as fee adjustments, litigation, bankruptcy, or significant leadership changes)

This ensures that prospective buyers always receive current information.

Prohibited Practices Under the FTC Rule

The regulation restricts franchisors from:

• Making earnings claims not supported by Item 19
• Misrepresenting fees, territory rights, or system support
• Withholding material information
• Providing incomplete or outdated disclosure forms
• Pressuring buyers to sign before the 14-day review period expires

The rule is designed to prevent deceptive practices and protect the integrity of the franchising marketplace.

Enforcement and Penalties

The FTC can enforce compliance through:

• Civil penalties
• Injunctions
• Restitution orders
• Corrective actions

In addition, state regulators in “registration states” may impose separate requirements, which franchisors must follow alongside federal rules.

Why the FTC Rule Matters to Prospective Franchisees

The rule provides several protections:

• A standardized disclosure format
• Transparent fee structures
• Verified financial performance representations
• Time to conduct due diligence
• Clear recourse in cases of misrepresentation

It ensures buyers receive the information needed to assess risk, compare opportunities, and understand the full scope of obligations before signing.

The Bottom Line

The FTC Franchise Rule establishes the foundation for transparency and fairness in U.S. franchising. By regulating pre-sale disclosure and financial performance claims, it helps prospective franchisees evaluate opportunities with confidence and reduces the likelihood of misunderstandings or misrepresentation.

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