An important protection for the person planning to buy a franchise is the FTC's Franchise Rule, put into effect October 21, 1979. The rule requires covered franchisors to supply a full disclosure of the information a prospective franchisee needs in order to make a rational decision about whether or not to invest. This disclosure must take place at the first personal contact where the subject of buying a franchise is discussed and at least 10 business days prior to signing any contract with the franchisee or accepting any money. This is a "cooling-off' period intended to prevent franchisees from jumping in without carefully reviewing and considering what they're doing.
This means a franchisor, franchise broker or anyone else representing franchises for sale has to present a disclosure document-the Franchise Disclosure Document (FDD)-containing extensive information about the franchise. Furthermore, you must be provided with completed contracts covering all material points at least five days prior to the actual date of execution of the documents. Again, this provides another cooling-off period and the chance to have an attorney review the contracts prior to execution.
Visit the FTC's Franchise and Business website to find out more about the Franchise Rule.
State Laws
The FTC doesn't require franchisors or business opportunity sellers to register with it or any other government agency. However, several states do have registration rules requiring franchise sellers to register. Some of these states laws are tougher than others, but most have adopted the FDD guidelines for their disclosure requirements.
It would be a mistake, however, to assume that simply because a franchise is registered with a state or provides some type of full disclosure document, you as a consumer are going to be protected from the possibility of failure or rip-off. The only thing that a state reviewing agency can do is ensure that the franchisor has responded and filed the necessary documents.
Franchise Registration States | ||
| These 15 states require a franchisor to register its UFOC and maintain a registration with the state agency indicated. If the company is authorized to sell franchises in one of these states, the company will be registered with the agencies listed here. Two of these 15 states do not require a filing of offering circulars, as noted below. | ||
| State | Agency | Telephone Number |
| California | Department of Corporations | (916) 445-7205 |
| Hawaii | Department of Commerce, Franchise & Securities Division | (808) 586-2722 |
| Illinois | Attorney General's Office, Franchise Division | (217) 782-4465 |
| Indiana | Secretary of State Office, Franchise Division | (317) 232-6681 |
| Maryland | Attorney General's Office, Securities Division | (410) 576-6360 |
Michigan (notice req'd) | Attorney General's Office, Consumer Protection Division, Franchise Section | (517) 373-7117 |
| Minnesota | Minnesota Department of Commerce, Franchise Division | (651) 296-6328 |
| New York | Department of Law, Franchise & Securities Division | (212) 416-8211 |
| North Dakota | Office of the Securities Commissioner, Franchise Division | (701) 328-2910 |
Oregon (filing not req'd) Rhode Island | Division of Securities, Dept. of Insurance and Finance Division of Securities, Franchise Office | (503) 378-4387 (401) 222-3048 |
| South Dakota | Division of Securities, Franchise Office | (605) 773-4013 |
| Virginia | State Corporation Commission, Franchise Office | (804) 371-9276 |
| Washington | Department of Financial Institutions, Securities Division | (360) 902-8760 |
| Wisconsin | Wisconsin Securities Commission, Franchise Office | (608) 266-3364 |
Source: The Small Business Encyclopedia, Start Your Own Business, Entrepreneur magazine and Entrepreneur's StartUps magazine.
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