Franchises - Frequently Asked Questions
Franchise opportunities abound. More and more people are considering franchising as a means to expand their
opportunities. An experienced franchise attorney can assist clients in avoiding the pitfalls that plague this
arena. Mr. Kurtz assists his franchise clients in creating franchise programs and structuring franchise
relationships that benefit all concerned.
An individual buys a franchise because they believe that they have a better chance of success than starting a
business from scratch. The franchisee expects that the franchise owner (you) will increase their odds for
success. In considering whether or not to franchise your business, consider the following:
 | Is your business financially successful? |
| Is it easy for someone else to acquire the skills necessary to operate and promote this business?
|
| Is your industry growing or stable? |
| Do you have experience in operating multiple locations? |
| Is the franchise easily fundable? Can the buyer obtain funding from commonly available sources? |
| What, precisely, are you offering the buyer? Will you still have something to offer once their business
has been in operation for a while? |
| Is there a sufficient profit margin in this business to profitably support the franchisee and to pay you
a franchising royalty? |
If the answer is yes to all of these, your next step should be to contact a reputable franchise lawyer.
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A franchise requires three key elements:
Unifying name or mark
One of the parties (the Franchisor) gives the other (the Franchisee) the right to operate a business in
association with the Franchisor’s trade name, trademark, service mark, or logo. Customers are given the
understanding that the franchisee belongs to a chain or association of businesses which are associated with this
name or mark.
Business assistance or control
The Franchisee must operate their business in accordance with the franchisor’s business system and marketing.
The Franchisor has substantial control over the manner in which the Franchisee operates its business.
Franchise Fee
The Franchisee pays the Franchisor for the rights described above.
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From the FTC web site
A franchise or business opportunity seller must give you a detailed disclosure document at
least 10 business days before you pay any money or legally commit yourself to a purchase. You can use these
disclosures to compare a particular business with others you may be considering or simply for information. The
disclosure document includes:
| names, addresses and telephone numbers of at least 10 previous purchasers who live closest to you; |
| a fully audited financial statement of the seller; |
| background and experience of the business' key executives; |
| cost of starting and maintaining the business; and |
| the responsibilities you and the seller will have to each other once you've invested in the opportunity. |
If the seller doesn't give you a disclosure document, ask why. Verify the explanation with an attorney, a
business advisor or the FTC by calling its toll-free helpline at 1-877-FTC-HELP (382-4357). Even if the business
is not legally required to provide a disclosure document, you still may want one for your own information.
For more information: Franchise
and Business Opportunities
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The Franchise Rule states what must be disclosed and provides its own disclosure format. It is published in
the Code of Federal Regulations, Volume 16, Part 436 (16 CFR § 436), which may be found by link to the following
page: www.ftc.gov/ftc/legal.htm.
The Commission also permits the use of an alternative disclosure format, called
the Uniform Franchise Offering Circular (UFOC), issued by the North American Securities Administrators
Association, for Franchise Rule compliance. Guidelines for preparing UFOC disclosures are available from:
North American Securities Administrators Association
750 First Street, Suite 710
Washington, DC 20002
(202) 737-0900
www.nasaa.org/Industry___Regulatory_Resources/Uniform_Forms/
Franchisors who use the UFOC must follow these guidelines to comply with the Franchise Rule.
You can also find the current state and federal guidelines in the Business Franchise Guide, published by
Commerce Clearing House, Inc., in many law libraries.
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Before deciding to purchase a franchise, you should obtain a copy of the franchisor’s offering circular. The
offering circular describes key provisions of the franchise agreement and also provides crucial information
about the franchisor. Review it with an eye to these points:
| Is the offering circular current? An offering circular expires after a year. You should insist upon
seeing the currently registered version. If it is close to a year old, make certain that a newer version has
not already been written or submitted to the governing agency for approval.
|
| Study the audited financial statements, particularly the most recent one. By studying the financial
statements, you should be able to determine how successful the franchisor is and how successful its existing
franchisees are. Question any aspect of the statements that aren’t clear to you. Ask your accountant to
review them and provide feedback to you. |
| Visit the franchisor’s headquarters. Do they appear to have the resources that are needed? Do their
personnel appear to be competent? |
| Prepare a business plan. Be as realistic as possible with your projections. Get actual numbers whenever
possible. Ask your accountant to review the plan and provide feedback. |
| Check references. Phone or visit both current and prior franchise owners. Ask probing questions. |
If you are comfortable with all of your fact-finding, consult a reputable franchise lawyer to assist you in
negotiating your franchise purchase.
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Thirteen (13) states keep franchise offering circulars on file, and 23 states require business opportunity
disclosure filings. The Franchise Rule requires franchise and business opportunity sellers to provide to
prospective purchasers a disclosure document or franchise offering circular. The FTC does not require filings of
these documents, so we are unable to provide copies to consumers. A total of 13 states keep franchise offering
circulars on file, and 26 states require business opportunity disclosure filings. Most states provide copies of
these disclosures, usually by allowing visitors to their offices by appointment to review or copy the documents.
A few private companies may make franchise disclosure documents filed in one or more states available for a
fee. The FTC doesn’t support or endorse these companies:
FRANDATA Corporation
1665 North Fort Meyer Dr., Suite 410
Arlington, VA 22209
(703) 740-4707
www.frandata.com
FranchiseHelp, Inc.
101 Executive Boulevard, 2d Floor
Elmsford, NY 10523
(800) 401-1446
www.franchisehelp.com
Also, consumers searching for franchise documents may wish to check an online database maintained by the
California Department of Corporations, known as Cal-EASI:
www.corp.ca.gov/caleasi/caleasi.htm
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No federal or state agency or private organization can tell you whether a company is legitimate or operates
in good faith. The FTC or the Better Business Bureau can report on whether consumers have complained about a
company. But, operators of fly-by-night franchise and business opportunity scams know this, and may change the
name and location of their company every few months to avoid a record of consumer complaints.
There is no substitute for checking the track record of a franchisor or business opportunity seller by
personally talking to at least 10 prior purchasers. That’s why the Franchise Rule requires companies to give
consumers a list of the names, addresses and telephone numbers of at least 10 prior purchasers who are
geographically closest to you. Interview these prior purchasers about their experiences. Ask questions to verify
that they have purchased the franchise or business opportunity and that they are not being paid to provide a
favorable review. A scheming promoter of a bogus business opportunity may line up "singers" who provide phony
testimonials. Visit their business locations in person.
If you want information about consumer complaints from the FTC, request it in writing. Address your request
to:
Freedom of Information Act Request
Federal Trade Commission
Washington, D.C. 20580.
Please identify your letter as a "FOIA Request" and include (1) your name, address and daytime phone number,
and (2) the name and address of the company you are asking about.
In most cases, the FTC does not charge the public for searching, reviewing documents, or copying. Still, it
is a good idea to state the maximum you are willing to pay, so we can contact you in the unusual event that any
applicable fees for these services will be higher than your limit.
You can also request information from the Better Business Bureau and look up information about the franchise
or business opportunity seller online at: www.bbb.org.
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A franchisor (the seller) is required by federal law to prepare a detailed offering circular disclosing
specific information about itself, its personnel and the franchise agreement, and to provide that to potential
franchisees (buyers.)
In states such as California, Hawaii, Illinois, Indiana, Maryland, Minnesota, New York, North Dakota, Rhode
Island, South Dakota, Virginia, or Washington, the circular must be reviewed and approved by the appropriate
state agency. Some states require compliance with additional state laws as well.
As laws change from state to state, it is imperative to have wise, experienced counsel from a competent
franchise lawyer.
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