What the FTC Says Buyers Must Receive 14 Days Before Any Signature or Payment

Under the Federal Trade Commission's Franchise Rule, a franchisor must give every potential franchisee a franchise disclosure document, or FDD, covering 23 specific items about the franchise, its officers and its other franchisees. The rule is set out in Parts 436 and 437 of Title 16 of the Code of Federal Regulations. The FTC says its purpose is to give prospective buyers the material information they need to weigh the risks and benefits of an investment.

The FTC also describes a timing requirement. The FTC says the FDD must be received at least 14 days before a prospective franchisee is asked to sign any contract or pay any money to the franchisor or one of its affiliates. The FTC advises buyers to speak up if they do not receive the FDD and to ask questions as they review it.

What the 23 Items Cover

The FTC's Franchise Fundamentals post describes what the items cover. Item 1 covers the franchisor's background, including parent companies, predecessors, affiliates and any legal requirements unique to the franchised business, such as special licenses or permits. Item 2 covers directors, principal officers and key executives, and their experience. Item 3 covers prior litigation, including crimes, liability findings, settlements and lawsuits against franchisees in the past year. Item 4 covers bankruptcy filings by the franchisor, its affiliates or its executives.

Items 5 through 7 cover initial and ongoing costs, including fees, deposits, inventory, equipment, leases, royalties and advertising fees. Items 8 and 12 cover restrictions on purchases, suppliers, products or services, sales territory and internet sales. Item 11 covers advertising fund contributions, how the money is spent, and training.

Item 17 covers renewal, termination, transfer, non-compete provisions and dispute resolution, such as court or arbitration. Item 20 covers outlet growth and turnover, and contact information for current and former franchisees and franchisee associations. Item 21 covers the three most recent audited annual financial statements, and newer franchises may have special requirements. Item 22 covers copies of all proposed agreements, including the franchise agreement.

Taken together, the items cover the franchisor, its people, its money and the contracts a buyer would sign.

Item 19 and Earnings Claims

Item 19 covers financial performance representations, meaning claims about sales or earnings. According to the FTC post, the rule does not require franchisors to include this information, but most do. Any sales or earnings claims must appear in Item 19. Otherwise, the franchisor and other sellers, such as brokers and dealers, cannot make them.

The post says two narrow exceptions are covered in a later installment of the series. It also says the FDD itself does not prove that a franchisor is reputable.

The Sequence From Application to Payment

The FTC describes the order of events. A prospective buyer submits an application to the franchisor. Once the franchisor has received that application and agrees to consider it, the buyer has the right to receive the FDD.

The FDD must then be received at least 14 days before the buyer is asked to sign any contract or pay any money to the franchisor or its affiliate. The document comes first, the waiting period runs, and only then can a franchisor ask for a signature or a payment.

The FTC post also suggests that buyers ask detailed questions about costs, supplier requirements and advertising fund use. It recommends talking to as many current and former franchisees as possible, having an accountant review the financial statements, and considering scenarios involving renewal, resale and termination.

The 14-Day Window and Affiliate Payments

The timing requirement covers payments to affiliates as well as to the franchisor. The FTC's wording names the franchisor or its affiliate, so a fee owed to a related company falls under the same 14-day requirement as a fee owed to the franchisor.

The period is measured from when the FDD is received. A request for a signature or payment cannot come before that period has run.

Item 22 covers copies of all proposed agreements, so the contracts a buyer would be asked to sign are part of the document received during that period.

The FTC post lists a late, incomplete or evasive FDD, and pressure to rush, as warning signs. If a buyer does not receive the FDD, the FTC advises speaking up and asking questions as the document is reviewed.

Monetary Thresholds and Inflation Adjustments

The rule sets monetary thresholds for three exemptions. The FTC's press releases date the revisions to those thresholds June 13, 2012 and May 16, 2016. The Federal Register notices for those revisions are dated June 18, 2012 and May 19, 2016.

On July 12, 2024, the FTC published inflation-adjusted thresholds for the three exemptions, and the new amounts took effect that day. The FTC says the rule requires it to adjust the thresholds for inflation every four years, based on the Consumer Price Index. The Commission voted 5-0 to approve the Federal Register notice.

The new amounts, with the previous figures in parentheses, are:

- Low-cost sales: sales where the buyer pays less than $735 (previously $615).

- Large-investment sales: sales where the franchisee pays at least $1,469,600 (previously $1,233,000), excluding the cost of unimproved land and any franchisor or affiliate financing.

- Large-entity sales: sales to large entities, such as multi-unit franchisees, airports, hospitals and universities, that have been in business for at least five years and have a net worth of at least $7,348,000 (previously $6,165,000).

Rule Dates and the FTC Compliance Guide

The FTC lists 26 Federal Register notices on the rule, dated from April 7, 1995 to July 12, 2024. Among the dated actions are the 2012 and 2016 revisions, a press release dated Feb. 13, 2019 announcing a request for public comment as part of the FTC's review of the rule, and a Federal Register notice dated October 2, 2020, on information-collection activities submitted for OMB review.

The FTC also publishes a Franchise Rule Compliance Guide for franchisors. The FTC describes it as helping franchisors comply with the amended rule, lists its date as May 2008, and links to a PDF version. The FTC also lists amended-rule FAQs and the text of the rule as related resources.

For a buyer, the two checks are whether the FDD covers all 23 items and whether the 14-day period has run before any signature or payment is requested.