Understanding Franchise Advertising Law

Franchise advertising laws are strict and specific, and rightfully so. Franchisors often walk a fine line between sharing useful information about the opportunity, business model and previous performance and overselling or misrepresenting the opportunity. By following advertising laws, franchisors are able to protect everyone involved in the transaction and encourage long-term success.

“Franchise advertising laws are akin [to] our industry’s caveat emptor (let the buyer beware),” said Tom O’Connell, franchise attorney at Buchalter. “Requirements like not including inferences that profits are assured, the purchase of a franchise is a safe investment or that failure is impossible ultimately helps protect franchisors from hasty investors and lawsuits based on buyer’s remorse.”

Because of this, there are laws regarding how and where a franchisor can discuss the opportunity, starting with one of the most essential documents in franchising: the Franchise Disclosure Document (FDD).

Franchisors are required to have a finalized FDD for prospective franchisees to review before making their decision and, in some cases, this document has to be filed with state governments before the franchise can officially offer opportunities in that state.

The FDD is often provided to prospective franchisees after they have expressed interest in the franchise by filling out an inquiry form or calling/emailing the development team. It is seen as an important step forward in the due diligence process. However, there are also rules about franchisors’ advertising materials that are visible to the general public. In many states, franchisors are required to file their advertising materials for approval prior to publication, and others require franchisees to register or file a notice before starting to use new advertising materials.

All of these regulations are in place to protect both the franchisor and prospective franchisees, and franchisors should be sure to consider all of the requirements when creating an advertising strategy.

“The law in most registration states requires that examiners have between three and seven business days for the state to review and comment on advertising materials. This might suggest advertising materials can be thought of, drafted, filed and published in a matter of days, but I would never advise moving that quickly,” O’Connell said. 

“Franchise sales aren’t a swipe right exercise and advertising materials shouldn’t chase spur of the moment trends or impulse buys. This is the start of a five, 10, 20 or more year partnership,” he continued. “Thought of that way, I usually recommend that the franchisor plan out the coming year’s advertising campaigns at the same time we are working together on the franchisor’s FDD. This can be months, not days, in advance of the ultimate filing with the states. Done this way, it is much more rare to receive a comment from an examiner let alone having the advertising materials put on hold.”

Where Do Advertising Materials Need To Be Filed?

Franchisors need to submit advertising materials to the state in California, Maryland, Minnesota, New York, North Dakota and Washington prior to taking the materials public. Once the waiting period — which ranges from three to seven business or calendar days — has passed with no contact from the state, franchisors can begin to use their materials.

Other states require a registration or notice filing to inform the government of the franchise offering. There are different requirements nationwide, but some form of filing is required in California, Connecticut, Florida, Hawaii, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, Nebraska, New York, North Dakota, Rhode Island, South Dakota, Texas, Utah, Virginia, Washington and Wisconsin.

Where Do Digital Advertisements Fall?

Online advertising materials like a franchise development website or social media posts do not require the same process as traditional advertising, but there are still rules.

To advertise online, the content cannot be directed to any specific person and the franchisor must have its URL included in its most recent FDD. Each advertisement must also include a disclaimer. There is a general disclaimer stating that the advertisement alone does not serve as a franchise sales offering, which is true nationwide. 

There are also state-specific requirements for disclaimers. California, Maryland, Minnesota and New York all have unique requirements for the information and/or language that must be included.

Can Franchisors Talk About Revenue Publicly?

Many franchisors choose to include an Item 19 in the FDD. This includes some form of earnings representation, though there are different levels of detail. Some franchisors choose to share the average unit volume for locations throughout the entire system within a given year, while others provide more segmentation, separating revenue amounts based on top, middle and lowest performance percentiles or segmenting the system based on how long owners have been in business.

Regardless, the representations that exist in an approved FDD should be the basis for any other revenue statements. Any earnings claims that are included in advertising materials should be sourced from the most recent Item 19 and not altered in any way.

What Else Should Franchisors Know?

In addition to key requirements surrounding disclaimers and disclosures, franchise marketing has some gray areas. 

According to the International Franchise Association, all advertising must be “truthful and not misleading,” and this muddies the waters when it comes to subjective statements like “This is the best opportunity on the market,” or “This pizza is most favored by Italians.” The IFA notes that, if a statement could be reasonably interpreted as a fact, there must be data to back it up. 

“Data-based statements can be an effective and legal advertising tool so long as the advertisement doesn’t veer into making a financial performance representation — particularly one that is not consistent with the franchise disclosure document — and doesn’t imply that success is assured or failure is impossible,” O’Connell said. “While you don’t want to sound like a pharmaceutical commercial, including a reference to the source of data and adding a disclaimer can also add an extra level or protection for the franchisor.”

Comparisons with competitors can also be risky business. While explicit comparisons are technically allowed, franchisors need to ensure that any messaging is entirely factual and does not have ambiguous or misleading implications.

Testimonials can be a valuable addition to advertising materials, but they must be genuine. Real franchisees can share truthful accounts of their experience with the brand assuming that their statements fall within the guidelines of all other advertising requirements. For example, a franchisee cannot make explicit revenue representations about a single unit.

Call on the Experts

The ins and outs of franchise advertising law are detailed and specific. While published guidelines can provide franchisors with a good baseline understanding of the requirements, it is recommended that franchisors work in tandem with franchise attorneys to evaluate all advertising material and adjust accordingly prior to public launch.

Read more about franchise law on 1851:

• Franchise Lawyers: Navigating Legal Dynamics in Franchising
• Understanding Item 11 of the Franchise Disclosure Document
• Franchise Registration States | Essential Info
• What Franchisees Should Know Before Hiring a Law Firm