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Federal Trade Commission Serves as Franchise Watchdog

Written on December 3rd, 2007 by Ryan Lee in brandEXPANSION News.

The Federal Trade Commission is an autonomous governing body created by the US government to observe that franchisees do not suffer in the hands of unscrupulous franchisor in the franchising industry. The commission has a very important role in the smooth running of the sector; it is the watchdog to sniff out frauds and malpractices. First and foremost, the Federal Trade Commission has made it mandatory for every franchisor to disclose vital information about their businesses that will influence the potential franchisee’s decision. This information has to be given 10 days before signing any official agreement. This clause provides the franchisee enough time to evaluate the franchisor.

By rule, the franchisor will also have to give name of some of its franchisees that the prospective entrepreneur can contact. It also needs to give the details of any lawsuit that has been or is filed against the company. Another area where FTC has strong ruling is the earning claims. Most fraudulent companies lure unsuspecting potential franchisees by giving huge return promises. But under FTC rule, when a franchisor makes an earning claim, he has to back it with solid data. If they make claims in their ads that such numbers of peoples have already profited from their franchise, then they have to give details of these franchisees. Also, there should be a cautionary language about claims made in the advertisement of the franchisor.

There should not be contradictory claims between the disclosure document and any written or oral commitment made by the franchisor. Federal Trade Commission also defines that the relationship among franchisee and franchisor varies from case to case. For example, franchisees going for “Traditional Franchises” will have different rules than those going for “Business Opportunity”. But one thing should be kept in mind, FTC does not have the power to prosecute any offender, but it can, of course, bring lawsuits against the companies. It can enforce liabilities against the company and those associated with it and help the wronged franchisee get back the money through court orders. The commission’s Act cannot be enforced by private law.

These protections are intended to keep unscrupulous companies from defrauding potential franchisees. brandEXPANSION associates also can help you navigate the purchase process to ensure that you’re getting all the information you need ahead of time.