What is a franchise offering circular?
The Federal Trade Commission (the “FTC”) has a requirement that mandates all business acting as a franchisor to have an information packet known as a franchise offering circular. When any business is discussing the possibility of becoming a franchise, the franchisor must give this franchise offering circular to the interested business and they must do it the first time they meet face to face or at least ten days before the potential franchisee signs any agreements or pays any fees. As for what the franchise offering circular is, it includes various information about the franchise and its operation, to help the interested company determine whether becoming a franchise would be the right business move. Among other things, the franchise offering circular should include:
(i) information about the franchisor’s business;
(ii) information about any litigation or bankruptcies the franchisor has been involved in;
(iii) an explanation of what franchise fees there are;
(iv) an estimate of what the franchisor expects the franchisee business to invest in terms of purchasing specific supplies and equipment, as well as an explanation of any restrictions on where those supplies and equipment can be purchased from;
(v) any other obligations which the franchising business must comply with;
(vi) any restrictions on what territories the franchising business can operate in, and any territory protection offered to the franchising business (e.g., an assurance that the franchisor will not sell another franchise within X miles);
(viii) what trademarks and other intellectual property the franchising business will have the right to use, and how they can use it;
(ix) how disputes between the franchisor and the franchising business would be resolves; and
(x) how either party can renew or terminate the franchise relationship and what happens at that time.
In addition to the above information, the franchisor must also include a copy of audited financial statements in the franchise offering circular along with a copy of all agreements that the franchising business would ultimately be required to sign.