What Franchisors Must Disclose in 23 Items, and the 14-Day Minimum Before Signing
The federal Franchise Rule sets 23 disclosure items and a 14-day minimum between delivery and signing. Here is what each part does for a franchisee.
Federal law requires the franchisor to furnish a written disclosure document before the prospective franchisee signs a binding agreement or makes a payment. The Federal Trade Commission says its Franchise Rule, set out in 16 CFR Parts 436 and 437, exists to give prospective purchasers the material information they need to weigh the risks and benefits of an investment.
The disclosure document is the core of that rule. It has 23 items covering the franchisor, its fees, the franchisee's estimated initial investment, its track record and any earnings claims. The rule covers offers and sales of franchises to be located in the United States or its territories, unless a transaction is exempted under subpart E. A violation is treated as an unfair or deceptive practice under Section 5 of the FTC Act. Two timing requirements in 16 CFR 436.2 control when a prospective franchisee can sign or pay.
What the 23 Items Cover
Items 1 through 4 cover the franchisor's background. They address the franchisor, its parents, predecessors and affiliates (Item 1), the business experience of its key people (Item 2), litigation (Item 3) and bankruptcy (Item 4). Item 2 lists directors, principal officers and others with management responsibility, along with their positions and employers over the past five years. Item 4 covers bankruptcy filings or discharges within the past 10 years.
Items 5 through 7 cover money at the start. Item 5 covers initial fees, Item 6 covers other fees, and Item 7 covers the estimated initial investment. Item 5 also states the conditions under which initial fees are refundable. Item 7 sets out payment methods, due dates and payees in a standard table.
Items 8 through 17 describe the operating relationship. They cover restrictions on where products and services must come from (Item 8), the franchisee's obligations (Item 9), financing (Item 10), the franchisor's help with advertising, systems and training (Item 11), territory (Item 12), trademarks (Item 13), patents, copyrights and proprietary information (Item 14), participation in actual operations (Item 15), limits on what can be sold (Item 16), and renewal, termination, transfer and disputes (Item 17).
Items 18 through 23 cover public figures (Item 18), financial performance representations (Item 19), outlets and franchisee information (Item 20), financial statements (Item 21), contracts (Item 22) and receipts (Item 23). Item 19 is where any earnings figures must sit, and it is separate from the start-up costs in Item 7. It requires a reasonable basis and written substantiation for those claims. Item 21 requires audited financial statements, with limited phase-in options for start-up systems. Item 23 is a detachable receipt that lists the disclosure date, the seller and the exhibits.
The 14-Day Minimum Before Signing or Paying
Under 16 CFR 436.2(a), the franchisor must furnish its current disclosure document at least 14 calendar days before the prospective franchisee signs a binding agreement. The same timing applies before the franchisee makes a payment to the franchisor or an affiliate. The rule applies to payments "in connection with the proposed franchise sale."
The rule counts calendar days, so weekends and holidays fall inside the period. The 14 days are a minimum, not a target. The section applies unless the transaction is exempted under subpart E of the part, and this article does not cover those exemptions.
Section 436.2(c) sets out how a document counts as furnished on time. Hand delivery, fax, email or other delivery by the required date counts. So does giving directions for accessing the documents online by that date. A paper or tangible electronic copy, such as a disk or CD-ROM, counts if it was mailed by first-class U.S. mail to the address the prospective franchisee specified, at least 3 calendar days before the required date.
Seven Days for Material Changes
If the franchisor unilaterally and materially changes the basic franchise agreement or related agreements, it must give each revised agreement to the prospective franchisee at least seven calendar days before the franchisee signs it, under 16 CFR 436.2(b). The related agreements are those attached to the disclosure document.
The same section says that changes resulting from negotiations the prospective franchisee started do not trigger that seven-day period. A franchisee who asks for edits and receives them is therefore treated differently from one whose franchisor rewrites terms on its own.
The period runs from delivery of each revised agreement to the franchisee's signature on that revised version. A franchisee who receives a revised version the day before signing does not have the full seven days under this section.
“Fourteen calendar days is the minimum gap between receiving the disclosure document and signing, and it applies to payments too.”
Where the Federal Rule Stands Now
The FTC's record of the rule lists a July 12, 2024 Federal Register notice titled "Disclosure Requirements and Prohibitions Concerning Franchising." The same day, the agency issued a press release on inflation-adjusted monetary thresholds for three exemptions. A separate press release from that day, as listed on the FTC page, concerns franchisee complaints and illegal fees.
The FTC's listing runs back to an April 7, 1995 request for comments on the trade regulation rule. Earlier entries include a February 13, 2019 request for public comment as part of the agency's review of the rule, and threshold adjustments in 2012 and 2016. The FTC's notice list dates those adjustments to June 18, 2012 and May 19, 2016. Its press releases are dated June 13, 2012 and May 16, 2016. The most recent notice in that listing is the July 2024 notice.
State laws may also apply to franchise sales. This article covers only the federal rule.
What to Track on Your Own Calendar
Three dates decide whether the federal timing was met: the date the current disclosure document was received, the date of any revised agreement the franchisor issued on its own initiative, and the first date a payment was made.
Writing down those three dates in one place makes the 14-day and 7-day periods easy to check against the signing date. Item 7 (estimated initial investment) and Item 19 (financial performance representations) are where the cost and earnings figures in the document appear. Item 17 is the place to check the renewal, termination, transfer and dispute terms that sit alongside them.
