Q: We purchased a franchise only to discover a few weeks later that the franchisor had not mentioned some significant hidden costs as well as problems at the franchisor's headquarters related to lawsuits, locations closing and staff layoffs. It also turns out that the franchise was not registered to offer franchises in our state. Does the lack of state registration give us a loophole to demand our money back?
A: If a franchisor is required to register in a particular state, a lack of proper registration might give you some significant leverage in getting your money back. But the state in which the franchise has its offices is not a registration state and neither is the state in which you bought the opportunity. Therefore, a lack of registration isn't really an issue.
Upon closer look, we discovered that there were indeed some significant problems with the company. Many of the locations the company said were open were not. The company had also not mentioned several pieces of litigation, some of which were significant. Some of the people you had met were really not employees of the company, although the salesman had introduced them to you as employees. The equipment and inventory you needed to buy to open the business was very expensive, and you couldn't obtain any of the equipment used, as you'd been led to believe. There were also some problems in getting the type of retail space you needed.
Unless it was intentional, it would be hard to understand how the franchisor had made so many errors in their disclosure. As it turns out, the company you paid money to was not a franchisor after all. The owners of the company said they didn't even know the requirements for being a franchisor. They thought that since their state didn't require any franchise registration, they could just call themselves a franchise because it sounded good. You happened to be this company's very first "franchisee."
Had you read any articles or books on buying a franchise, you probably would have understood that a franchisor is required to provide pre-sale information in the form of a disclosure document. You would also have known to hire a qualified franchise lawyer to help you understand your rights under the franchise agreement and maybe even an accountant to help you understand the investment and some of the business risks. Unfortunately, you didn't take any of these crucial steps.
While you could go directly to the state regulators or attorney general's offices, it's really time for you to hire some professional legal help. The money you saved by not hiring an attorney to help determine whether your investment was a safe one will now be spent to see if there is anything left of your investment at all.
Michael H. Seid is managing director of Michael H. Seid & Associates, a West Hartford, Connecticut- and Troy, Michigan-based management consulting firm specializing in the franchise industry. Seid co-wrote Franchising for Dummies (IDG Books) with Dave Thomas, the late founder of Wendy's, and serves on the International Franchise Association's Board of Directors.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.