What is the 7 day FDD disclosure rule?
The 7-day FDD disclosure rule or waiting period is part of the Federal Trade Commission (FTC) Franchise Rule. The FTC requirement prevents a franchisor from receiving a binding franchise agreement or funds from a prospective franchisee until the prospect has held the FDD for 14 calendar days. A 7-day waiting period is required if the franchisor unilaterally alters the terms and conditions of the Franchise Agreement. The justification for the rule is clear: any material alterations to terms and conditions should be disclosed to the prospective franchisee before the agreement is executed.
Further, the rule only applies to materially altered terms and conditions if done unilaterally by the Franchisor. If the prospective franchisee initiates negotiations that result in material changes to certain terms and conditions, the 7-day rule does not apply.
Essentially, a prospective franchisee does not need additional time to review and consider changes made to agreements at their request. However, a franchisee should be advised and allowed time to consider material changes made by the Franchisor.
How do franchisors comply with the 7-day hold?
Compliance with this rule is similar to compliance with the 14-day hold. The rule requires a full 7 calendar day wait period exclusive of the day the material alterations to an agreement are disclosed to the prospective franchisee and the day the agreement is signed (7 days with 2 bookends ). Therefore, if the franchisor unilaterally and materially alters an agreement and discloses the changes on January 8, the agreement can be signed by the prospective franchisee on January 16.
Calculating Compliance with the 7-day & 14-day hold | ||||
January 1 | January 2 – January 7 | January 8 | January 9 – January 15 | January 16 |
FDD disclosed to Prospective Franchisee | 14-day hold | Franchise Agreement signed and/or payments made to Franchisor/Affiliate in connection with proposed franchise sale | ||
Franchisor unilaterally and materially alters an agreement | 7-day hold | Franchise Agreement signed and/or payments made to Franchisor/Affiliate in connection with proposed franchise sale | ||
You can use our Franchise Agreement Calculator to calculate a closing date.
When does the 7-day hold apply?
The 7-day hold only applies to alterations to material terms and conditions in the franchise agreement or related agreements. Whether a term or condition is material can vary depending on the contract, the parties and the franchise system.
What kind of material alterations could be subject to the 7-day hold?
What constitutes unilateral material alteration can vary, and range from changes in fees, interest rates, or territory descriptions.
Often material changes are the result of a Franchise Disclosure Document that does not contain clear terms or ambiguous ranges, such that a franchisee prospect cannot understand all material terms and conditions of the franchise agreement.
The FTC has provided some guidance on this topic. Obtaining the opinion of counsel will help confirm whether you need to comply with the 7-day hold.
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