Franchise Rule SS '11 fin_mtd

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 address the
sale of business format and product franchises exclusively.2 Second, the amendments minimize
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

1

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

2

The current clearance under OMB Control Number 3084-0107 covers the disclosure and
recordkeeping requirements of the original Franchise Rule, 16 C.F.R. Part 436, which applied both to the sale
of franchises and of business opportunity ventures. The disclosure and recordkeeping requirements applicable
to business opportunity ventures are separately set forth in 16 C.F.R. Part 437, and are covered under OMB
Control Number 3084-0142. The portion of the prior clearance applicable to business format franchisors
under Part 436 retains the pre-existing OMB Control Number 3084-0107.
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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,

amendments require 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 recognize new technologies by permitting
franchisors to furnish disclosures electronically, whether by CD-ROM, email, or access to a Web
site. Finally, the amendments reduce 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 may 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

Since the Rule went into effect in 1979, the expanded use of computers has reduced the
time needed to generate initial disclosure documents, prepare updates, and audit financial
statements. Consistent with the aims of the Government Paperwork Elimination Act, 44 U.S.C.
§ 3504 note, the Commission has amended the Rule to permit 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. The Rule also permits
the use of electronic signatures and electronic recordkeeping.

franchisors now must use the Franchise Disclosure Document (“FDD”) format, which, in turn, has
incorporated the UFOC’s requirements..

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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.
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 alternative law enforcement
program, a firm accused of violating the Franchise Rule is given 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-to-date. The Rule requires only a one-time disclosure to a prospective purchaser, and

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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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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

The Commission has had a long history of seeking outside input regarding the Rule,
beginning first with the extensive proceeding that resulted in the issuance of the original Rule.
The final rulemaking record for the original Rule contained more than 300,000 pages of
comments and exhibits from industry, consumers, public officials, and academicians. When
issuing the Rule, the Commission also published proposed compliance guidelines for public
comment. As a result of the comments, the guidelines were extensively redrafted and final
guidelines were published on August 24, 1979.
In 1995, the Commission conducted a review of the Franchise Rule as part of its
systematic rule review program, and sought public comment on: (1) the continuing need for the
Rule; (2) the costs and benefits of the Rule; and (3) what changes, if any, should be made to the
Rule to reduce the burdens and costs imposed on the firms subject to its requirements. In
response, the Commission received numerous comments and held two public workshop
conferences. The commenters overwhelmingly expressed continuing support for the Rule as a
cost-effective way to disseminate material information to prospective franchisees and a
necessary tool to prevent fraud and reduce the level of post-sale franchise relationship disputes.
In response to other comments received, the Commission published an Advance Notice
of Proposed Rulemaking (“ANPR”) in the Federal Register, announcing its intention to consider
amending the Rule5 and again seeking comment on various ways to reduce compliance burdens,
including: (1) whether franchisors may comply with the Franchise Rule through the Internet and
other electronic media; and (2) whether the Commission should create appropriate exemptions to
lessen compliance burdens. In response to the ANPR, the Commission received 167 comments.
In addition, the Commission held six public workshop conferences on the Franchise Rule
throughout the United States in which 64 interested parties participated, including franchisees,
franchisors, and state franchise regulators.
Based on the ANPR record, the Commission issued a Notice of Proposed Rulemaking in
1999 for amendments to the franchise rule intended, among other things, to reduce many
inconsistencies between federal and state disclosure requirements, permit the use of electronic

5

62 Fed. Reg. 9,115 (Feb. 28, 1997).

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disclosure, and increase exemptions to the Rule.6 The Notice of Proposed Rulemaking included
a detailed discussion of the PRA burden of the proposed changes, including estimated changes in
hours and costs, but the Commission received no applicable comments.
In September 2004, the Commission also sought public comment on an FTC Staff Report
on the Franchise Rule,7 recommending that the Commission adopt staff’s proposed amendments
to the Rule.8 Forty-five commenters submitted comments, which helped inform staff’s final
recommendations to the Commission.
In ensuing years, the Commission has sought public comment to pursue renewed OMB
clearance for the Rule under the Paperwork Reduction Act (“PRA”), including, most recently,
this past August. See 76 Fed. Reg. 49,479 (Aug. 10, 2011). No comments were received.
The Commission is providing a second opportunity for public comment on its burden analysis as
required by 5 CFR Part 1320.
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 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 who 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.

6

64 Fed. Reg. 57,294 (Oct. 22, 1999).

7

Bureau of Consumer Protection, Staff Report to the Federal Trade Commission and Proposed
Revised Trade Regulation Rule (16 C.F.R. Part 436) (Aug. 2004) (“Staff Report”).
8

69 Fed. Reg. 53,661 (Sept. 2, 2004).

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12.

Burden Estimate
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. 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 who 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 prepare their initial disclosure documents, or 7,500 hours, cumulatively, for the latter group.
These estimates parallel staff’s 2008 estimates for the amended Rule. No public comments were
received on those prior estimates; accordingly, the FTC retains them for the instant analysis
subject to further opportunity for public comment.
As recognized in the 2008 analysis, covered franchisors also may need to maintain
additional documentation for the sale of franchises in non-registration states, which could take
up to an additional hour of recordkeeping per year. Assuming, as before, an hour of incremental
recordkeeping per covered franchisor, this yields an additional cumulative total of 2,500 hours
for all covered franchisors.
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. Accordingly, staff believes that incremental recordkeeping burden, if any,
would be de minimis.
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: $3,597,500
Labor costs are derived by applying appropriate hourly cost figures to the burden hours
described above. The hourly rates used below are estimated averages.
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Commission staff anticipates that an attorney will prepare the disclosure document.
Applying the above assumptions to an estimated hourly attorney rate of $250 yields the
following yearly totals: $7,500 per new franchisor (or, $1,875,000, cumulatively, for new
franchisors) and $750 per established franchisor (or, $1,687,500, cumulatively, for established
franchisors). Combined, then, cumulative labor costs for all covered franchisors to prepare the
disclosure document is $3,562,500.
The FTC additionally anticipates that recordkeeping under the Rule will be performed by
clerical staff at approximately $14 per hour.9 Thus, 2,500 hours of recordkeeping burden per
year for all covered franchisors will amount to a total annual labor cost of $35,000.
Cumulatively, then, total estimated labor cost under the Rule is $3,597,500 (($7,500
attorney costs x 250 new franchisors = $1,875,000) + ($750 attorney costs x 2,250 established
franchisors = $1,687,500) + ($14 clerical costs x 2,500 franchisors = $35,000)).
13.

Estimated Capital/Other Non-Labor Costs Burden

When initially developing cost estimates 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 advertising their goods or services and to facilitate communication
with the public. Accordingly, any costs franchisors would incur specifically as a result of
electronic disclosure under the Rule appear to be minimal.
As set forth in the 2008 Notices, FTC staff estimates that the non-labor burden incurred
by franchisors under the Franchise Rule differ 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 =

9

Based on mean and median hourly rates for file clerks found in the “National Compensation
Survey: Occupational Earnings in the United States 2010,” U.S. Department of Labor, released May 2011,
Bulletin 2753, Table 3 (“Full-time civilian workers,” mean and median hourly wages), available at
http://www.bls.gov/ncs/ocs/sp/nctb1477.pdf.

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$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

Staff’s current request is based on the same estimated annual hours burden and non-labor
cost burden as in 2008. The annual labor cost burden estimate has increased $2,500 from 2008
because of revised labor cost estimates from the Bureau of Labor Statistics.
16.

Statistical Use of Information
There are no plans to publish any information for statistical use.

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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