Franchise Rule '17 SS fin

Supporting Statement
Trade Regulation Rule on Disclosure Requirements and
Prohibitions Concerning Franchising
(OMB No. 3084-0107)
1.

Necessity for Collecting the Information

In 1978, the Federal Trade Commission (“FTC” or “Commission”) issued the original
Trade Regulation Rule on Disclosure Requirements and Prohibitions Concerning Franchising, 16
C.F.R. Part 436 (“Franchise Rule” or “Rule”), after concluding that lengthy investigations and a
rulemaking proceeding revealed evidence of widespread deceptive and unfair practices in the
sale of franchises and business opportunities. The Commission’s investigation disclosed that
prospective purchasers often found it difficult to obtain reliable information about proposed
franchise and business opportunity investments and to otherwise verify the representations of the
sellers and brokers offering them for sale.
The Rule requires franchisors and franchise brokers to furnish to prospective investors a
disclosure document that provides information relating to the franchisor, the franchisor’s
business, the nature of the proposed franchise relationship, and additional information about any
claims concerning actual or potential sales, income, or profits for a prospective franchisee
(“financial performance claims”). The franchisor must also preserve the information that forms a
reasonable basis for such claims.
The Rule requires all disclosures to: (1) be made at least 14 calendar days before any
sale; and (2) use disclosure documents that comply with the form and content set forth in the
Rule. It does not regulate the substantive terms of the franchisor-franchisee relationship. Nor
does it require registration of the offering or the filing of any documents with the Commission in
connection with the sale of franchises.
Revisions to the Rule1 took final effect on July 1, 2008 after a one-year phase-in. Among
other things, the amendments accomplished five objectives. First, the amendments addressed the
sale of business format and product franchises exclusively.2 Second, the amendments minimized
prior inconsistencies between federal and state disclosure requirements by merging the Rule’s
disclosure requirements with the Uniform Franchise Offering Circular (“UFOC”) disclosure
format accepted by the 15 states that have franchise registration and disclosure laws.3 Third, the
amendments required the disclosure of more information on the quality of the franchise
relationship, such as litigation franchisors initiate against their franchisees and the existence of
any franchisee associations. Fourth, the amendments recognized new technologies by permitting
1

72 Fed. Reg. 15,444 (Mar. 30, 2007).

2

The disclosure and recordkeeping requirements applicable to business opportunity ventures, which were covered
by the Franchise Rule prior to July 1, 2008, are separately set forth in 16 C.F.R. Part 437, and are covered under
OMB Control Number 3084-0142.
3

Before July 1, 2008, when the amended Rule took effect, some 95 percent of all franchisors used the UFOC
disclosure format. As required by the amended Rule, and permitted by all state franchise laws, franchisors now
must use the Franchise Disclosure Document (“FDD”) format, which, in turn, has incorporated the UFOC’s
requirements.

franchisors to furnish disclosures electronically, whether by CD-ROM, email, or access to a Web
site. Finally, the amendments reduced compliance costs by creating disclosure exemptions for
sophisticated investors and for sales to franchisor “insiders” who are already familiar with the
franchise system’s operations.
2.

Use of the Information

Prospective franchisees use the disclosures required by the amended Franchise Rule to
become better informed about the proposed investment and to verify representations made by a
franchisor.
If the franchisor chooses to make financial performance claims, disclosures are necessary
for analyzing the credibility of those claims. For example, a franchisor might represent to a
prospective franchisee that the franchisee should expect annual sales of $500,000. Without the
Rule, the franchisee would have difficulty in assessing the accuracy or reliability of the claim.
To make sure the franchisee can accurately assess the claim, the Rule requires the franchisor to:
(1) indicate the number and percentage of franchises whose performance equaled or exceeded
the claim; and (2) preserve and offer to show prospective franchisees the background material
upon which the claim is based. This allows the prospective franchisee to form an independent
judgment about the reliability of the claim. It also discourages the use of unrealistic financial
performance claims, because the franchisor knows that the franchisee can determine whether an
earnings claim is credible by examining the background material. The Rule also requires that
any background material must be shown to the Commission in the course of any compliance
investigation so that the Commission may evaluate whether the basis for the claim is reasonable.
3.

Consideration of Using Improved Information Technology to Reduce Burden

Consistent with the aims of the Government Paperwork Elimination Act, 44 U.S.C.
§ 3504 note, the amended Rule permits franchisors greater latitude in using new technologies, in
particular the Internet, to further reduce compliance costs. Franchisors are now able to reduce
significantly printing and distribution costs through the expanded use of email and the Internet to
furnish disclosure documents. 16 C.F.R. §§ 436.2(c), 436.6(g). The Rule also permits the use of
electronic signatures and electronic recordkeeping. 16 C.F.R. §§ 436.1(u), 436.6(h); see 72 Fed.
Reg. at 15,517-18.
4.

Efforts to Identify Duplication/Availability of Similar Information

The fifteen states with franchise disclosure laws similar to the Rule previously required
the use of the UFOC disclosure format, and would not accept disclosures in the format
prescribed by the original Franchise Rule.4 The amended Rule directly avoids any possible
duplication. Since it took effect on July 1, 2008, the FDD disclosure format prescribed by the
amended Rule has provided a single disclosure that can be used in all of the franchise registration
states because it incorporates the UFOC requirements.
4

The Commission permitted the use of the UFOC while the original Franchise Rule remained in effect, in lieu of the
Rule’s disclosure format. Consequently, there was never any requirement that franchisors prepare one disclosure
document for federal use, and another for use in franchise registration states.

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5.

Efforts to Minimize Burden on Small Businesses

Unlike most state franchise disclosure laws, the Rule does not require the franchisor to
register or file disclosure documents with the government before offering or selling a franchise.
Thus, compliance with the Rule does not involve the fees usually associated with registering or
filing state disclosure documents, a consideration that might be especially important to small
businesses.
Also, since August 1998, Commission staff have participated in an alternative law
enforcement program initially organized by the National Franchise Council and now operated by
the International Franchise Association (“IFA”), a trade association whose membership consists
of both franchisors and franchisees. The IFA’s members include many small businesses in
addition to some of the country’s largest franchisors. Under the IFA’s alternative law
enforcement program, a firm accused of violating the Franchise Rule has three options: (1) sign
a consent decree in U.S. district court; (2) be sued by the FTC; or (3) go to the IFA for training,
compliance monitoring, and, where appropriate, mediation of franchisee claims. Firms do not
need to be IFA members in order to participate. The FTC oversees the program, deciding which
types of violations are appropriate for a referral to the IFA, as well as the terms of compliance
monitoring. In addition, aggrieved franchisees may seek money through the program’s thirdparty mediator. The program is limited to disclosure problems only, and does not cover hardcore
fraud cases. The FTC will continue to handle all serious fraud cases and many disclosure cases
through traditional law enforcement, including seeking injunctions, redress, and civil penalties,
where warranted. Because the FTC’s law enforcement resources are limited, the alternative law
enforcement program greatly helps the Commission in enforcing the Rule and increasing
compliance.
6.

Consequences of Conducting Collection Less Frequently

Reducing the frequency of disclosure under the Rule would not serve a useful end
because it would deprive prospective franchise purchasers of material information that is up-todate. The Rule requires only a one-time disclosure to a prospective purchaser, and minimizes the
burden of information collection by requiring only annual updates of the mandated disclosures,
unless there is a material change during the year. In that case, only a quarterly attachment
updating the FDD is required to reflect that change.
7.

Circumstances Requiring Collections Inconsistent with Guidelines

The collection of information in this Rule is consistent with all applicable guidelines
contained in 5 C.F.R. § 1320.5(d)(2).
8.

Consultation with Outside Sources

Consistent with 5 C.F.R. § 1320.8(d), the Commission recently sought public comment
on the Paperwork Reduction Act (44 U.S.C. Chapter 35) (“PRA”) aspects of the Rule. See 82
Fed. Reg. 26,103 (June 6, 2017). No such comments were received. The Commission is

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providing a second opportunity for public comment while seeking OMB approval to extend the
existing PRA clearance for the Rule.
9.

Payment or Gift to Respondents
Not applicable.

10.

Assurances of Confidentiality

No assurance of confidentiality is necessary, since franchisors do not register or file any
documents with the Commission. To the extent that information covered by a recordkeeping
requirement is collected by the Commission for law enforcement purposes, the confidentiality
provisions of Sections 6(f) and 21 of the FTC Act, 15 U.S.C. §§ 46(f), 57b-2 will apply.
11.

Sensitive or Private Information

Under the provisions of the amended Rule, a franchisor must disclose certain franchisees’
names, business addresses, and business telephone numbers. Disclosing this information lets
prospective franchisees conduct their own due diligence investigation of the franchisor’s claims,
in particular financial performance claims. No other information about individual franchisees
must be disclosed. For example, franchisors that choose to make a financial performance claim
based upon the earnings history of current franchisees need not identify in the disclosure
document the individual franchisees whose information formed the basis of the earnings claim,
or the earnings of any individual franchisee or franchised location.
12.

Estimated Annual Hours and Labor Cost Burden
Estimated annual hours burden: 16,750 hours

Based on a review of trade publications and information from state regulatory authorities,
staff believes that, on average, from year to year, there are approximately 2,500 sellers of
franchises covered by the Rule, with perhaps about 10% of that total reflecting an equal amount
of new and departing business entrants.5 Commission staff’s burden hour estimate reflects the
incremental tasks that the Rule may impose beyond the information and recordkeeping
requirements imposed by state law and/or followed by franchisors that have been using the FDD
disclosure format nationwide. This estimate likely overstates the actual incremental burden
because some franchisors, for various reasons, may not be covered by the Rule (e.g., they sell
only franchises that qualify for the Rule’s large franchise investment exemption of at least $1
million).
Staff estimates that the average annual disclosure burden to update existing disclosure
documents will be three hours each for the 2,250 established franchisors, or 6,750 hours
cumulatively for them, and 30 hours apiece each year for the 250 or so new entrant franchisors to
5

This number, which was also used in the FTC’s 2014 clearance request, appears to be consistent with the number
of business format franchise offerings registered in compliance with state franchise laws and listed in franchise
directories.

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prepare their initial disclosure documents, or 7,500 hours, cumulatively, for the latter group.
These estimates parallel staff’s 2014 estimates for the amended Rule.6 No public comments
were received on those prior estimates nor on those for this requested renewal. Accordingly, the
FTC retains them for this analysis subject to further opportunity for public comment.
Under the Rule, a franchisor is required to retain copies of receipts for disclosure
documents, as well as materially different versions of its disclosure documents. Such
recordkeeping requirements, however, are consistent with, or less burdensome than, those
imposed by the states that have franchise registration and disclosure laws. Accordingly, staff
believes that incremental recordkeeping burden, if any, would be de minimis.
Covered franchisors also may need to maintain a record of the single additional FDD for
use in non-registration states, which may differ from FDDs used in registration states. This may
require as much as an additional hour of recordkeeping per year. Assuming, as FTC staff has in
the past, an hour of incremental recordkeeping per covered franchisor, this yields an additional
cumulative total of 2,500 hours for all covered franchisors.
Based on the above assumptions and estimates, average yearly burden for new and
established franchisors during a prospective three-year clearance would be 16,750 hours ((30
hours of annual disclosure burden x 250 new franchisors) + (3 hours of average annual
disclosure burden x 2,250 established franchisors) + (1 hour of annual recordkeeping burden x
2,500 franchisors)).
Estimated annual labor cost burden: $3,600,000
Labor costs are derived by applying appropriate hourly cost figures to the burden hours
described above. The hourly rates used below are estimated averages.
Commission staff anticipates that an attorney will prepare the disclosure document.
Applying the above assumptions to an estimated hourly attorney rate of $2507 yields the
following annual totals: $7,500 (30 hours x $250) per new franchisor (or, $1,875,000,
cumulatively, for new franchisors) and $750 (3 hours x $250) per established franchisor (or,
$1,687,500, cumulatively, for 2,250 established franchisors).
The FTC additionally anticipates that recordkeeping under the Rule will be performed by
clerical staff at approximately $15 per hour.8 Thus, 2,500 hours of recordkeeping burden per
year for all covered franchisors will amount to a total annual labor cost of $37,500.
6

See 79 Fed. Reg. 41,284 (Jul. 15, 2014); 79 Fed. Reg. 59,771 (Oct. 3, 2014) (“2014 Notices”).

7

Commission staff believes this is a reasonable proxy for mean hourly attorney rates for franchisor consultation on
compliance with the Rule’s disclosure and recordkeepings requirements.
8

Based on mean hourly wages for file clerks found in “Occupational Employment and Wages – May 2016,” U.S.
Department of Labor, released March 31, 2017, Table 1, available at http://www.bls.gov/news.release/
ocwage.nr0.htm. In contrast to labor costing above for attorneys, see note 7 supra and accompanying text, FTC staff
has drawn upon BLS wage data for file clerks because staff believes it presents a representative proxy for
recordkeeping tasks under the Rule. The mean hourly wage rate for “lawyers” within this BLS table, however, is
just $67.25, which staff believes greatly understates the hourly cost for lawyer consultation tied to the Rule.

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Cumulatively, then, total estimated labor cost under the Rule is $3,600,000 (($7,500
attorney costs x 250 new franchisors = $1,875,000) + ($750 attorney costs x 2,250 established
franchisors = $1,687,500) + ($15 clerical costs x 2,500 franchisors = $37,500)).
13.

Estimated Capital/Other Non-Labor Costs Burden

In developing cost estimates initially for this Rule, FTC staff consulted with practitioners
who prepare disclosure documents for a cross-section of franchise systems. The FTC believes
that its cost estimates remain representative of the costs incurred by franchise systems generally.
In addition, many franchisors establish and maintain websites for ordinary business purposes,
including for advertising their goods or services and facilitating communication with the public.
Accordingly, any costs franchisors would incur specifically because of electronic disclosure
under the Rule appear to be minimal.
As set forth in the 2014 Notices, FTC staff estimates that the non-labor burden incurred
by franchisors under the Franchise Rule differs based on the length of the disclosure document
and the number of them produced. Staff estimates that 2,000 franchisors (80% of total
franchisors covered by the Rule) will print and mail 100 disclosure documents at $35 each. Thus,
these franchisors would each incur an estimated $3,500 in printing and mailing costs. Staff
estimates that the remaining 20% of covered franchisors (500) will transmit 50% of their 100
disclosure documents electronically, at $5 per electronic disclosure. Thus, these franchisors will
each incur $2,000 in distribution costs (($250 for electronic disclosure [$5 for electronic
disclosure x 50 disclosure documents]) + ($1,750 for printing and mailing [$35 for printing and
mailing x 50 disclosure documents])).
Accordingly, the cumulative annual non-labor costs for the Rule is approximately
$8,000,000 (($3,500 printing and mailing costs x 2,000 franchisors = $7,000,000) + ($250
electronic distribution costs + $1,750 printing and mailing costs) x 500 franchisors =
$1,000,000)).
14.

Estimate of Cost to Federal Government

Staff estimates that the annualized cost to the Commission (per year over the 3-year
clearance renewal being sought) to administer and enforce the amended Rule will be
approximately $120,000. This estimate includes attorney, clerical, and other support staff costs.
15.

Changes in Burden
Not applicable.

16.

Statistical Use of Information

There are no plans to publish any information for statistical use.

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17.

Failure to Display of the Expiration Date for OMB Approval
Not applicable.

18.

Exceptions to the Certification for Paperwork Reduction Act Submissions
Not applicable.

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