Advertising in Franchising
Effective and efficient advertising is an essential part of succeeding in franchise sales.
Develop and execute
Franchisors typically maintain an in house sales teams or rely upon outside brokers and consultants to generate leads. From a legal perspective, any advertising plan requires an understanding of advertising generally and advertising in the franchise context.
We are a franchise focused law firm and we are not experts in business, but we empower our clients with the knowledge they need to develop and execute their marketing plans with purpose and compliance in mind.
Soliciting prospects to purchase a franchise is regulated by the federal franchise rule, state specific laws, and laws governing truth in advertising and fair dealing. So, what are the requirements for franchise advertising?
The Cardinal Rule in Franchise Sales
There are a few cardinal rules to observe concerning franchise advertising.
Under federal and state franchise laws, no statement, claim, promise, or representation may be made to any prospective franchisee which is either unsupported by the franchisor’s disclosure document or inconsistent with the disclosure document.
If a franchisor’s advertising features a statement, representation, or promise that is unsupported by the disclosure document or which is contrary to its contents, the franchisor subjects itself to possible liability under most franchise laws. The franchisee may also be able to sue and recover substantial damages for any misrepresentations that are made by the franchisor.
Additionally, some states have individual prohibitions for franchise advertisements. For example, a number of states prohibit franchise advertising that contains particular types of statements or inferences, such as:
- That a purchase of a franchise is a safe investment
- That failure, loss, or default is impossible or unlikely
- That earnings or profits are assured
Some states prohibit earnings claims being placed in advertisements at all. Moreover, in enforcing the above standards, some state administrators have taken the position that even the use of the words “success” or “profits” in virtually any context is prohibited.
Advertising Mediums in the franchise context
The term advertising in the franchise sales context, as opposed to consumer advertising, is defined extremely broadly under federal and state franchise laws, including most any medium like:
- Newspaper, television, and radio ads
- Brochures
- Slide shows for prospects
- Reproduced newspaper or magazine articles
- Form solicitation letters
- Recorded telephone messages
- Audio and video sales presentations
- Videotapes, DVDs, and CD-ROMs
- Mass emails
- Internet advertising activity
- Any other means of communication utilized to promote the offer or sale of a franchise
Not Limited to the Public
A unique consideration to take into account as a franchisor is the purpose of the advertisement, because the rules are different depending on the purpose. For example, information sent out to employees may not typically be viewed as an advertisement, but can be in the franchise sales context. Even a newsletter or email to an employee can be considered an advertisement if the purpose of the communication is to influence them to purchase a franchise. It does not matter that the advertisement is not public in the traditional sense.
Registration Required
Certain states have passed laws regulating franchises specifically. Franchisors are typically familiar with these states as filing or registration states. Most states that regulate franchise sales impose some form of advertising requirement. Certain other states also regulate advertising generally or through business opportunity laws. There are approximately 20 states that require some filing for franchise advertisements. Fortunately, online advertising is typically excluded from registration so long as the advertisement is not directed specifically to a resident of their state and the franchisor complies with certain general registration or disclosure requirements. We encourage franchisors to work closely with a trusted franchise attorney who can provide personalized advice with risk tolerance in mind, review advertisements, draft disclaimers, and file any required registrations.
Disclaimers Required
Disclaimers are an indispensable part of franchise sales advertising because franchises can only be offered or sold through disclosure of the franchisor’s then-current franchise disclosure document (the “FDD”). The content of the disclaimer may vary depending on the content and context of the advertisement, along with the intended audience.
Sample Disclaimers
Franchise General Advertisement Disclaimers
This advertisement is not an offering. An offering can only be made by a Franchise Disclosure Document (FDD). The following states regulate the offer and sale of franchises: CA, HI, IL, IN, MD, MI, MN, NY, ND, OR, RI, SD, VA, WA and WI. If you are a resident of one of these states or intend to operate a franchise in any of these states, [Franchisor] will not offer or sell you a franchise unless and until we have complied with any applicable pre-sale registration and/or disclosure requirements in your state.
Consider also adding the franchisors legal name, mailing address, and phone number (required by some states). You may also want to spell out the state names for avoidance of doubt, but many clients like to reduce the length of their disclaimers when possible to do so.
Additional Disclaimers often Required
New York and California require specific disclaimers, and it may be best practice to include these disclaimers in all advertisements for sake of uniformity and to avoid any inadvertent violations.
New York:
In New York, an offering can only be made by prospectus filed first with the Department of Law of the State of New York. Such filing does not constitute approval by Department of Law.
California:
THIS FRANCHISE HAS BEEN REGISTERED UNDER THE FRANCHISE INVESTMENT LAW OF THE STATE OF CALIFORNIA. SUCH REGISTRATION DOES NOT CONSTITUTE APPROVAL, RECOMMENDATION, OR ENDORSEMENT BY THE COMMISSIONER OF BUSINESS OVERSIGHT NOR A FINDING BY THE COMMISSIONER THAT THE INFORMATION PROVIDED HEREIN IS TRUE, COMPLETE, AND NOT MISLEADING.
Franchise Earnings Claims Disclaimers
Certain states prohibit earnings claims in advertisements. All states prohibit any earnings claim that is not included in Item 19 of the then-current FDD. Therefore, any advertisement or collateral with a financial performance representation should be carefully reviewed to ensure strict compliance. Further, the disclosures should be uniformly include in the FDD used across they country. In addition to all general and state specific disclaimers, an advertisement with a FPR should include a specific disclaimer, such as:
[GROSS REVENUE OR OTHER FINANCIAL] figures are based on unaudited financial information as submitted by [franchises or company owned outlets] operating from January 1, 2023, through December 31, 2023. As of December 31, 2023, there were [#] franchised outlets in operation and [#] outlets achieved these results. Some outlets have earned this amount. Your individual results may differ. There is no assurance that you’ll earn as much. Written substantiation for the financial performance representation will be made available to the prospective franchisee upon reasonable request. See Item 19 of our [ISSUANCE DATE] FDD for further information.
Obtain Legal Advice
We strongly encourage franchisors to send their proposed advertisement collateral to a franchise attorney for review. This is true regardless of any applicable state registration requirements. Franchising is a niche are of the law and advertising is both an art and science. Working with a franchise attorney can pay dividends in maintaining compliance and avoiding headaches down the road. General information on the internet is helpful, but it is no substitute for legal advice. Complying with the legal requirements for franchise advertisements typically requires a case-by-case analysis.
