At What Point in The Sales Process Must a Franchisor Furnish The Disclosure Document?

The amended Rule provides that franchisors must furnish prospective franchisees with a disclosure document at least 14 calendar days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale. The 14 days begin the day after delivery of the disclosure document. The signing of any agreement or receipt of payment can take place on the fifteenth day after delivery. This ensures that prospective franchisees have at least a full 14 days in which to review the disclosures.

Upon reasonable request, franchisors also must furnish a disclosure document to a prospective franchisee earlier in the sales process than 14 calendar days before the franchisee signs or pays. The failure to comply with a reasonable request for an earlier delivery is an independent violation of the Rule. This does not mean that a franchisor must tender a disclosure document to any person who asks for a copy. Rather, it applies where the parties have taken steps to begin the sales process. For example, a prospective franchisee who has received a positive response from a franchisor after submitting an application to purchase a franchise may ask for a copy of the franchisor’s disclosure document at that time or thereafter. A franchisor may not charge any fee in connection with a prospective franchisee’s right to receive a disclosure document in advance of the disclosure deadline.

Payment to or Binding Agreement with the Franchisor or Affiliate

The amended Rule provides that disclosures must be furnished 14 days in advance of the franchisee making a payment to, or signing a binding agreement with, “the franchisor or an affiliate in connection with the proposed franchise sale.” This language makes clear that payments to, or agreements with, third parties do not trigger the franchisor’s disclosure obligation because a franchisor cannot control, or does not necessarily know, when a prospective franchisee may proceed to pay or make a commitment to third parties. Accordingly, payments or agreements that a prospective franchisee voluntarily makes on his or her own in connection with reviewing a franchise offer, such as providing a retainer to an attorney or payments for a market feasibility study, do not trigger a franchisor’s disclosure obligation.

Actions That Constitute the Furnishing of Disclosure Documents

Franchisors now have many options as to how they furnish disclosure documents. Under the amended Rule, a franchisor will have furnished a disclosure document in a timely manner if the franchisor has:

  • hand-delivered, faxed, emailed, or otherwise delivered to the prospective franchisee a copy of the document by the required date;
  • provided directions for accessing the document on the Internet to the prospective franchisee by the required date; or
  • sent a paper or tangible electronic copy (for example, a computer disk or CD-ROM) to the address specified by the prospective franchisee by first-class United States mail at least three calendar days before the required date.

CREDIT: The content of this post has been taken from the Federal Trade Commission’s document, Franchise Rule Compliance Guide.