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How the Government Protects Franchisees

You're not completely on your own while searching for a legitimate franchise. Certain regulations ensure franchisees' interests are protected.
October 14, 2002
URL: http://www.entrepreneur.com/article/56218

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:

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.