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.
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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.
Jeff Elgin has almost 20 years of experience in franchising,
both as a franchisee and senior franchise company executive. He is
currently the CEO of FranChoice
Inc., a company that provides free consulting to consumers
looking for a franchise that best matches their needs. He can be
reached at jelgin@FranChoice.com.
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.