Franchisor violations, why this should be important to you!

The Federal Trade Commission (FTC) oversees franchising in the U.S. and enforces compliance with the FTC Franchise Rule, which regulates the disclosure of information by franchisors to prospective franchisees. Common FTC violations in franchising include:

1. Failure to Provide a Franchise Disclosure Document (FDD)

• Franchisors are required to provide a current FDD at least 14 days before the franchisee signs any agreement or pays any fees. Failure to do so is a significant violation.

2. Misrepresentation or False Statements

• Including false, misleading, or deceptive information in the FDD or during the sales process, such as overstating potential earnings or underplaying risks.

3. Incomplete or Outdated FDD

• Not updating the FDD annually or failing to include mandatory disclosures, such as financial performance representations or litigation history.

4. Unauthorized Earnings Claims

• Making verbal or written earnings claims that are not included in Item 19 of the FDD or failing to substantiate these claims.

5. Failure to Register in Registration States

• In states requiring franchise registration (e.g., California, Illinois, New York), franchisors must register their FDD before offering or selling franchises. Selling unregistered franchises in these states violates both FTC and state laws.

6. Improper Advertising Practices

• Running advertisements that contain unsubstantiated claims or omit key information about the franchise opportunity.

7. Non-Disclosure of Key Relationships

• Failing to disclose relationships with suppliers, vendors, or affiliated companies that may create conflicts of interest.

8. Inadequate Training and Support

• Promising specific training or operational support in the FDD but failing to deliver these services.

9. Discriminatory Practices

• Offering different terms to prospective franchisees based on race, gender, or other protected characteristics.

10. Violation of State-Specific Franchise Laws

• Some states, such as California and Maryland, have additional franchise laws. Noncompliance with these state-specific laws constitutes a violation.

11. Unlawful Termination or Non-Renewal

• Terminating or failing to renew franchise agreements without following proper legal procedures or providing just cause.

12. Failure to Disclose Franchise Fees

• Omitting detailed explanations of initial fees, ongoing royalties, or other payments required by the franchisee.

13. Improper Enforcement of Non-Compete Clauses

• Imposing non-compete clauses that are overly broad or unreasonable in duration or scope.

14. Retaliation Against Whistleblowers

• Retaliating against franchisees who report violations or fraudulent practices.

Violations can lead to significant legal and financial consequences, including fines, rescission of franchise agreements, and damage to the franchisor’s reputation. Franchisors should regularly review their practices with legal counsel to ensure compliance with the FTC Franchise Rule and applicable state laws.

About the Author

Mike Stout is a highly accomplished franchise executive with extensive expertise in recruitment, real estate, construction, marketing, and operations across multiple industries and business models. He has a proven history of building high-performing teams and driving revenue growth for both emerging and established franchise brands in North America, Asia, Europe, Latin America, and the Middle East.

With over 30 years of experience in the franchising industry, Mike is recognized for his integrity, accountability, and urgency in leadership. His expertise encompasses recruiting and supporting franchisees, negotiating franchise agreements of all scales—from single-unit deals to expansive master franchises—and overseeing the successful opening of more than 1,500 units across multiple industries and continents. He is passionate about empowering franchisees and teams while achieving sustainable growth.

Having traveled to more than 45 countries for business and growing up in one of America’s most diverse cities, Mike possesses a deep understanding of diverse backgrounds, ethnicities, and cultures. This unique perspective allows him to build strong relationships and drive success in the dynamic world of franchising.