On January 23, 2007, the Federal Trade Commission (FTC) issued amendments to its Franchise Rule, which had been in place since 1978. The phased in Amended Franchise Rule is mandatory as of July 1, 2008. The original and Amended Franchise Rule gives prospective franchisees material information in order to weigh the risks and benefits of such an investment.

The Amended Rule reflects the FTC’s dedicated commitment to franchising; its role in the American economy; the needs and wants of franchisors, franchisees, professionals who serve them and the general public.

Although the Amended Rule closely tracks the original UFOC Guidelines, in some instances it requires more extensive disclosures, mostly with respect to certain aspects of the franchisee-franchisor relationship.

The Amended Rule features a series of new disclosure requirements designed to enable prospective franchisees to better assess the quality of their forthcoming franchise relationships and their likely success as franchisees.

There are a number of new and enhanced disclosure requirements in the Amended Rule, which I will outline for you later in this article. But first I want to bring to your attention the new requirement that the AAFD lobbied for.

That is the requirement for franchisors to identify in the FDD any and all franchise associations, including those sponsored and or endorsed by the franchisor as well as brand-specific independent franchise associations, which, to be disclosed, must be network-specific, organized under state law and must annually request to be included in the disclosure.

A brand-specific franchisee association is a vital component in any successful franchise system. The franchisee association is an independent organization of franchisees. It is different than advisory councils or other entities sponsored by the franchisor. Advisory councils are a common tool utilized by many franchise systems.

At the core of the AAFD efforts is to promote market driven franchise reform. The AAFD is dedicated to the growth and empowerment of strong and effective franchisee associations.

This Rule change now enhances the importance of the franchisee association because prospective franchisees will now be aware of their existence prior to purchasing a franchise. Since prospective franchisees will learn about the association in the FDD, and will be given contact information, prospective franchisees are encouraged to call the franchisee association for comments.

A franchisee association is a very effective method to advance the shared interests of franchisee members of a franchise system. Franchisees share in common many business interests, particularly the interest of current and future success of the brand and business model.

Very often the business interests of franchisees differ from the business interests of the franchisor. Even in the best of circumstances, franchisee and franchisor are utilizing different business strategies and often are operating from conflicting perspectives.

Many franchisee associations are formed to address a crisis or in response to a system-wide dispute. In such instances, the association will, at a minimum, be a resource to monitor the problem and engage in a group effort to resolve the dispute.

A franchisee association can have impact not only on promoting the interests of the franchisee but also on the franchise itself, and enhance the value of the brand for all parties involved. The benefits of a franchisee association include:

There is strength in numbers! At its essence, forming an association is to aggregate the collective interests of all franchisees. Members who share common interests and concerns are represented more effectively through a formalized support group, rather than speaking as individuals.

Enhanced franchisee communication. While the importance of monitoring events and dispute resolution cannot be overstated, the opportunity to communicate with other franchisees who share common interests, obstacles and opportunities is an equally important and vastly more interesting reason to form an association.

Nominating franchisee representatives. Some franchisee associations have identified which of their members are the best negotiators and then put them in charge of a purchasing co-op to the benefit of all members.

Such efforts generate not only great discounts up front, but also rebate programs based on achieving volume targets. While franchisor-sponsored advisory councils may provide a certain level of service, nominees from an independent franchisee association can provide a perspective that more closely reflects the interests of the franchisees.

Shared legal counsel. One of the advantages of a franchisee association is to engage legal counsel on a shared cost basis, just as the franchisor engages legal counsel; franchisees are better protected by having available ongoing legal advice.

Franchisor recognition. Formal recognition of the franchisee association by the franchisor is helpful but not necessary to the success of an independent franchisee association.

The Amended Rule that now requires franchisors, if requested, to disclose the existence of the independent franchisee association, will help all franchisors realize what some franchisors have learned on their own, i.e., that independent franchisee associations can indeed bring about positive outcomes for the entire franchise system.

The AAFD strongly believes that there should be an independent franchisee association in each franchise system. The independent franchisee association can have the effect of creating balance in the franchise relationship.

Some of the other new and enhanced disclosures in the Amended Franchise Rule:

Robert Purvin is the Chairman/CEO of the American Association of Franchisee & Dealers (www.aafd.org), a national non-profit trade association representing the rights and interests of franchisees and independent dealers throughout the United States.