Q: I know the franchise business is regulated, but I'm not sure how that works. Are there laws to protect me as I'm looking into franchising, and, if so, how do they work? Also, do I have any potential liability in the process of investigating franchises?
A: You are absolutely correct--there are various federal and state laws that protect your interests to some degree as you contemplate entering a franchise relationship. These laws generally relate to disclosures that companies must make to prospective buyers, and rules regarding franchise agreements in certain states.
Franchise companies' overriding disclosure requirement franchise companies is to provide you with a Uniform Franchise Offering Circular (UFOC), containing mandated disclosures, prior to your purchase of a franchise. The UFOC must include 22 separate disclosure items, though most of these fall into the following five general categories:
- History and Experience. A history of their past activities, especially as it relates to potentially negative information. This information must be provided not only for the company itself, but also for the principal people involved with the company. These factors include the business experience of the company and its principals and any fairly recent litigation or bankruptcy history for either.
- Financial Factors. The relevant financial terms of the franchise opportunity, including all required initial and ongoing fees, other start-up costs and an estimated range for your total cost to get into business.
- Obligations and Restrictions. The obligations of both the franchisee and the franchise company under the terms of the franchise agreement. They must also spell out any mandated restrictions you will operate under in terms of your purchasing options and behavior as a franchisee.
- Other Considerations. Relevant information on factors such as financing programs, territory, trademarks and patents, renewal or transfer provisions, public figures and earnings claims.
- Exhibits. These include audited financial statements, franchisee lists with contact information, contracts and receipts.
Besides the federal laws that mandate disclosure, some states have passed specific laws to further protect franchisees within that state. These laws may add additional disclosures or rules about franchise agreement terms. For example, a number of states require that the legal venue for any dispute must be in their state rather than in the state where the franchise company is based. These additional requirements vary from state to state, but any that are appropriate to your situation in your state should be disclosed in the UFOC you receive.
The most important point to remember in this entire matter is that you need to read and understand the material the franchisor discloses to you. The FTC requires these documents to be presented in "plain English," so the material should be clear. It won't make any difference, though, if you don't carefully review the material.
Make sure you take the time to study the information supplied to you, and you'll have a much better chance of making sure these legal requirements actually serve their purpose of protecting or safeguarding your interests.