The Truth Behind “Free” Franchise Consulting: How the FTC’s New Rule Impacts Franchise Brokers, FSOs, and Franchisors

By Joe Caruso

In a landmark move to protect consumers and raise the standard of honesty in marketing, the Federal Trade Commission (FTC) has issued a final rule prohibiting deceptive practices in the use of endorsements, testimonials, and consumer reviews. While much attention has focused on influencers and fake product reviews, the rule directly applies to franchise brokers, Franchise Sales Organizations (FSOs), and the franchisors that work with them.

Franchise brokers often promote their services as “free” to buyers while collecting commissions from franchisors. FSOs operate as agents of the franchisor and serve as intermediaries between brokers and brands. This multi-tiered commission structure must now be clearly disclosed. Failing to do so not only violates ethical standards—it can now lead to serious legal consequences.

The FTC’s Final Rule: A Brief Overview

On July 3, 2024, the FTC finalized its Rule on the Use of Consumer Reviews and Testimonials in Advertising (RIN 3084–AB96), giving the agency the ability to seek civil penalties of up to $51,744 per violation under Section 5(m)(1)(A) of the FTC Act.

Key provisions prohibit:

  • Failing to disclose material connections between endorsers and sellers
  • Misrepresenting that an endorser is independent or unbiased
  • Disseminating reviews or testimonials that are fake, false, or misleading

A material connection includes any form of compensation, incentive, or relationship that could affect how a recommendation is interpreted by a consumer.

“Failing to disclose an unexpected material connection with an endorser” constitutes a deceptive act under the final rule
— Federal Register, Vol. 89, No. 129, p. 54754–54761

Franchise Brokers: The “Free” Service That Isn’t Free

Franchise brokers frequently promote:

“My franchise consulting services are free to you, the buyer.”

What they often fail to disclose is that they:

  • Are compensated by franchisors (via commission from the franchise fee, sometimes $20,000–$40,000+ per deal)
  • May be financially incentivized to recommend one brand over another
  • Rarely provide full visibility into the universe of franchise options

These financial incentives become even more significant in multi-unit franchise deals three-pack, five-pack, or ten-pack sales. In such cases:

  • Broker and FSO commissions can exceed $100,000
  • Some franchisors forgo the entire franchise fee to fund the third-party commission
  • These arrangements can more than double the effective payout compared to a typical single-unit transaction

Whether it’s a $40,000 fee on one unit or $120,000 across multiple units, these deals introduce strong financial motivation. When this influence is not disclosed, the broker’s claim of offering “free” guidance becomes a legally risky and ethically questionable practice.

“An endorsement may be deceptive if the endorser does not clearly and conspicuously disclose a material connection…”
— Federal Register, p. 54761

FSOs: The Intermediaries Must Also Disclose

Franchise Sales Organizations (FSOs) typically:

  • Act as the franchisor’s outsourced sales force
  • Manage franchise lead flow, including from paid brokers
  • Engage directly with candidates through the discovery and awarding process

FSOs often benefit from the same deal economics as brokers. In some cases, they share a commission pool that consumes the entire franchise fee on the front-end sale. Whether directly paid or compensated through deal structuring, FSOs represent the franchisor and therefore carry the same legal duty to disclose material financial relationships.

If FSOs:

  • Fail to inform candidates that their broker is paid by the franchisor
  • Omit the financial arrangement behind a “free” offer
  • Don’t disclose their own compensated role

they could be seen as causing or facilitating a deceptive endorsement under FTC rules.

“A seller may be liable for the use of misleading reviews or endorsements, even if the seller did not create them, if the seller causes or facilitates the dissemination…”
— Federal Register, p. 54759

The Risk to Franchisors

Franchisors often outsource candidate generation to brokers and FSOs with minimal oversight. Yet under the rule:

  • Franchisors may be held liable for the misconduct of their agents
  • Liability extends to indirect participation or failure to supervise
  • The FTC considers the full sales journey not just franchisor communications as part of the marketing representation

It is critical that franchisors carefully review their third-party seller relationships, including FSOs and broker groups, not only from a business development standpoint, but with input from general counsel and outside franchise attorneys. These third parties act as agents of the franchisor, and their conduct reflects directly on the brand.

Too often, franchisors sign broker group agreements and FSO contracts after thoroughly reviewing the business terms and commission structures, but neglect to conduct a formal legal review of broader contractual obligations. This can result in missing vital protections regarding regulatory compliance, disclosure language, documentation practices, and communication controls.

Franchisors must:

  • Review all third-party messaging
  • Embed mandatory disclosure language into agreements
  • Ensure FSOs and brokers document all prospect-facing interactions
  • Maintain audit rights and regular compliance check-ins

Best Practices for Compliance

Franchise Brokers Should:

  • Clearly state, “I may receive a commission if you invest in a franchise I introduce you to”
  • Stop describing services as “free” without immediately clarifying who pays
  • Display disclosures on all websites, email templates, and presentation decks

FSOs Should:

  • Disclose their agency role and any compensation structures involved
  • Ensure consistent, compliant messaging across the candidate journey
  • Train sales representatives to answer honestly and consistently when asked about incentives

Franchisors Should:

  • Audit marketing materials and scripts used by third-party sellers
  • Require compliance training for all external franchise sales representatives
  • Establish and enforce a written policy for disclosure practices across all channels

Conclusion: Everyone in the Sales Chain Is Accountable

The FTC has created a new standard. Material connections must be disclosed clearly and consistently. This rule applies equally to franchise brokers, FSOs, and franchisors.

The stakes are especially high in multi-unit deals, where commissions exceeding $100,000 are common and sometimes consume the entire upfront franchise fee. Without full disclosure, candidates remain unaware of the powerful financial incentives influencing the process.

This rule is not just about regulatory compliance. It is an opportunity for the franchising community to raise its standards and lead with honesty.

There are outstanding third-party sellers, brokers, consultants, and FSOs that can enhance a brand’s recruitment process with reach, efficiency, and professionalism. These partners can be valuable assets. But franchisors must choose them wisely, ensuring they operate with the highest standards of honesty, ethics, disclosure, and documentation. The right partners help you grow your system while protecting your reputation and standing with regulators and franchise buyers alike.

References

  1. Federal Trade Commission. (2024). Rule on the Use of Consumer Reviews and Testimonials in Advertising (Final Rule). Federal Register, Vol. 89, No. 129, July 3, 2024, pp. 54752–54770.
  2. FTC Endorsement Guides (16 CFR Part 255). https://www.ftc.gov/legal-library/browse/rules/endorsement-guides

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