Misleading, Fraudulent or Incomplete Franchisor's Disclosure Document
Under the business law statutes of the Federal Trade Commission (FTC), the owner of a franchise business is required to disclose certain information to a potential franchise buyer in the Franchise Disclosure Document (FDD). A Franchise Disclosure Document must be given by a corporation to a prospective franchisee at least 14 days before any deals are made.
Within a typical Franchise Disclosure Document, there are 23 items that must be provided to the prospective franchisee. Item 19, the “earnings claim,” is optional, but a franchisor is prohibited by law from making any earnings representations outside of the document. The franchisor is not required to have the Franchise Disclosure Document legally reviewed before it is provided to a buyer, so if you intend to buy a franchise, it is important to review the document yourself before you sign an agreement with a business organization.
If after you purchase a franchise you find that the required information provided in the Franchise Disclosure Document is false, misleading, or incomplete, you may have a cause of action against the owner of the franchise. You should immediately contact an experienced franchise attorney to determine if the false, misleading, or incomplete information provided in the Franchise Disclosure Document is material, and therefore provides a potential basis for a lawsuit. Generally a material fact is one that a reeasonable person would believe to be important in making a decision on whether to buy a franchise or not.
If you have not yet bought a franchise, but are in the process of reviewing an FDD, you should also strongly consider having a franchise attorney review the disclosure agreement. A franchise attorney will be able to point out any information that is incomplete in the document and will recognize any information that may be misleading. The franchisee should be aware that while the FTC does require the owner of a franchise to provide certain information in the Franchise Disclosure Document, it does not require the franchise owner to list any of the material risks of buying the franchise. This information will likely always be missing from the disclosure document, and it will be up to you and your attorney to research the potential risks of any franchise investment.